REG - AT & T Inc. - 1st Quarter Results 2019
RNS Number : 5158AAT & T Inc.29 May 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8610
AT&T INC.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 43-1301883
208 S. Akard St., Dallas, Texas 75202
Telephone Number: (210) 821-4105
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of "accelerated filer," "large accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ ]
Emerging growth company
[ ]
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act
Name of each exchange
Title of each class
Trading Symbol(s)
on which registered
Common Shares (Par Value $1.00 Per Share)
T
New York Stock Exchange
Floating Rate AT&T Inc.
T 19B
New York Stock Exchange
Global Notes due June 4, 2019
Floating Rate AT&T Inc.
T 20C
New York Stock Exchange
Global Notes due August 3, 2020
1.875% AT&T Inc.
T 20
New York Stock Exchange
Global Notes due December 4, 2020
2.65% AT&T Inc.
T 21B
New York Stock Exchange
Global Notes due December 17, 2021
1.45% AT&T Inc.
T 22B
New York Stock Exchange
Global Notes due June 1, 2022
2.50% AT&T Inc.
T 23
New York Stock Exchange
Global Notes due March 15, 2023
Floating Rate AT&T Inc.
T23 D
New York Stock Exchange
Global Notes due September 5, 2023
1.05% AT&T Inc.
T 23E
New York Stock Exchange
Global Notes due September 5, 2023
1.30% AT&T Inc.
T 23A
New York Stock Exchange
Global Notes due September 5, 2023
2.75% AT&T Inc.
T 23C
New York Stock Exchange
Global Notes due May 19, 2023
2.40% AT&T Inc.
T 24A
New York Stock Exchange
Global Notes due March 15, 2024
3.50% AT&T Inc.
T 25
New York Stock Exchange
Global Notes due December 17, 2025
1.80% AT&T Inc.
T 26D
New York Stock Exchange
Global Notes due September 5, 2026
Title of each class
Trading Symbol(s)
on which registered
2.90% AT&T Inc.
T 26A
New York Stock Exchange
Global Notes due December 4, 2026
2.35% AT&T Inc.
T 29D
New York Stock Exchange
Global Notes due September 5, 2029
4.375% AT&T Inc.
T 29B
New York Stock Exchange
Global Notes due September 14, 2029
2.60% AT&T Inc.
T 29A
New York Stock Exchange
Global Notes due December 17, 2029
3.55% AT&T Inc.
T 32
New York Stock Exchange
Global Notes due December 17, 2032
5.20% AT&T Inc.
T 33
New York Stock Exchange
Global Notes due November 18, 2033
3.375% AT&T Inc.
T 34
New York Stock Exchange
Global Notes due March 15, 2034
2.45% AT&T Inc.
T 35
New York Stock Exchange
Global Notes due March 15, 2035
3.15% AT&T Inc.
T 36A
New York Stock Exchange
Global Notes due September 4, 2036
7.00% AT&T Inc.
T 40
New York Stock Exchange
Global Notes due April 30, 2040
4.25% AT&T Inc.
T 43
New York Stock Exchange
Global Notes due June 1, 2043
4.875% AT&T Inc.
T 44
New York Stock Exchange
Global Notes due June 1, 2044
5.35% AT&T Inc.
TBB
New York Stock Exchange
Global Notes due November 1, 2066
5.625% AT&T Inc.
TBC
New York Stock Exchange
Global Notes due August 1, 2067
At April 30, 2019, there were 7,298 million common shares outstanding.
Explanatory Note
AT&T Inc. (AT&T) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 6, 2019 (the Original Filing) to correct the signature dates and hyperlinks related to Exhibits 31.1, 31.2 and 32 of the Original Filing.
This Amendment is limited in scope to the items identified above. This Amendment does not reflect events occurring after the filing of the Original Filing and no revisions are being made to the Company's financial statements or disclosures pursuant to this Amendment.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AT&T INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in millions except per share amounts
(Unaudited)
Three months ended
March 31,
2019
2018
Operating Revenues
Service
$
40,684
$
33,646
Equipment
4,143
4,392
Total operating revenues
44,827
38,038
Operating Expenses
Cost of revenues
Equipment
4,502
4,848
Broadcast, programming and operations
7,652
5,166
Other cost of revenues (exclusive of depreciation and
amortization shown separately below)
8,585
7,932
Selling, general and administrative
9,649
7,897
Depreciation and amortization
7,206
5,994
Total operating expenses
37,594
31,837
Operating Income
7,233
6,201
Other Income (Expense)
Interest expense
(2,141)
(1,771)
Equity in net income (loss) of affiliates
(7)
9
Other income (expense) - net
286
1,702
Total other income (expense)
(1,862)
(60)
Income Before Income Taxes
5,371
6,141
Income tax expense
1,023
1,382
Net Income
4,348
4,759
Less: Net Income Attributable to Noncontrolling Interest
(252)
(97)
Net Income Attributable to AT&T
$
4,096
$
4,662
Basic Earnings Per Share Attributable to AT&T
$
0.56
$
0.75
Diluted Earnings Per Share Attributable to AT&T
$
0.56
$
0.75
Weighted Average Number of Common Shares
Outstanding - Basic (in millions)
7,313
6,161
Weighted Average Number of Common Shares
Outstanding - with Dilution (in millions)
7,342
6,180
See Notes to Consolidated Financial Statements.
AT&T INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Dollars in millions
(Unaudited)
Three months ended
March 31,
2019
2018
Net income
$
4,348
$
4,759
Other comprehensive income (loss), net of tax:
Foreign currency:
Translation adjustment (includes $0 and $2 attributable to noncontrolling interest),
net of taxes of $49 and $175
288
108
Securities:
Net unrealized gains (losses), net of taxes of $5 and $(4)
16
(12)
Derivative instruments:
Net unrealized gains, net of taxes of $34 and $180
127
674
Reclassification adjustment included in net income, net of taxes of $2 and $3
11
12
Defined benefit postretirement plans:
Net prior service (cost) credit arising during period, net of taxes of $0 and $185
-
567
Amortization of net prior service credit included in net income, net of taxes of $(113)
and $(105)
(346)
(323)
Other comprehensive income (loss)
96
1,026
Total comprehensive income
4,444
5,785
Less: Total comprehensive income attributable to noncontrolling interest
(252)
(99)
Total Comprehensive Income Attributable to AT&T
$
4,192
$
5,686
See Notes to Consolidated Financial Statements.
AT&T INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions except per share amounts
March 31,
December 31,
2019
2018
Assets
(Unaudited)
Current Assets
Cash and cash equivalents
$
6,516
$
5,204
Accounts receivable - net of allowances for doubtful accounts of $905 and $907
23,863
26,472
Prepaid expenses
1,518
2,047
Other current assets
14,575
17,704
Total current assets
46,472
51,427
Noncurrent Inventories and Theatrical Film and Television Production Costs
10,270
7,713
Property, plant and equipment
332,517
330,690
Less: accumulated depreciation and amortization
(200,466)
(199,217)
Property, Plant and Equipment - Net
132,051
131,473
Goodwill
146,434
146,370
Licenses - Net
97,001
96,144
Trademarks and Trade Names - Net
24,218
24,345
Distribution Networks - Net
16,623
17,069
Other Intangible Assets - Net
24,732
26,269
Investments in and Advances to Equity Affiliates
6,230
6,245
Operating Lease Right-of-Use Assets
20,235
-
Other Assets
24,118
24,809
Total Assets
$
548,384
$
531,864
Liabilities and Stockholders' Equity
Current Liabilities
Debt maturing within one year
$
11,538
$
10,255
Accounts payable and accrued liabilities
42,306
43,184
Advanced billings and customer deposits
5,956
5,948
Accrued taxes
1,130
1,179
Dividends payable
3,722
3,854
Total current liabilities
64,652
64,420
Long-Term Debt
163,942
166,250
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes
59,207
57,859
Postemployment benefit obligation
19,664
19,218
Operating lease liabilities
18,253
-
Other noncurrent liabilities
27,715
30,233
Total deferred credits and other noncurrent liabilities
124,839
107,310
Stockholders' Equity
Common stock ($1 par value, 14,000,000,000 authorized at March 31, 2019 and
December 31, 2018: issued 7,620,748,598 at March 31, 2019 and December 31, 2018)
7,621
7,621
Additional paid-in capital
125,174
125,525
Retained earnings
59,424
58,753
Treasury stock (323,523,763 at March 31, 2019 and 339,120,073
at December 31, 2018, at cost)
(11,452)
(12,059)
Accumulated other comprehensive income
4,345
4,249
Noncontrolling interest
9,839
9,795
Total stockholders' equity
194,951
193,884
Total Liabilities and Stockholders' Equity
$
548,384
$
531,864
See Notes to Consolidated Financial Statements.
AT&T INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions
(Unaudited)
Three months ended
March 31,
2019
2018
Operating Activities
Net income
$
4,348
$
4,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
7,206
5,994
Amortization of television and film costs
2,497
-
Undistributed earnings from investments in equity affiliates
112
(2)
Provision for uncollectible accounts
592
438
Deferred income tax expense
1,069
1,222
Net (gain) loss from investments, net of impairments
(175)
2
Actuarial (gain) loss on pension and postretirement benefits
432
(930)
Changes in operating assets and liabilities:
Accounts receivable
1,894
(439)
Other current assets, inventories and theatrical film and television production costs
(2,510)
614
Accounts payable and other accrued liabilities
(3,686)
(1,962)
Equipment installment receivables and related sales
652
505
Deferred customer contract acquisition and fulfillment costs
(375)
(826)
Retirement benefit funding
-
(140)
Other - net
(1,004)
(288)
Total adjustments
6,704
4,188
Net Cash Provided by Operating Activities
11,052
8,947
Investing Activities
Capital expenditures:
Purchase of property and equipment
(5,121)
(5,957)
Interest during construction
(61)
(161)
Acquisitions, net of cash acquired
(117)
(234)
Dispositions
10
56
(Purchases) sales of securities, net
(1)
(116)
Advances to and investments in equity affiliates, net
(111)
(1,007)
Cash collections of deferred purchase price
-
267
Net Cash Used in Investing Activities
(5,401)
(7,152)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less
(256)
-
Issuance of other short-term borrowings
296
-
Repayment of other short-term borrowings
(176)
-
Issuance of long-term debt
9,182
2,565
Repayment of long-term debt
(9,840)
(4,911)
Purchase of treasury stock
(189)
(145)
Issuance of treasury stock
167
11
Dividends paid
(3,714)
(3,070)
Other
109
2,048
Net Cash Used in Financing Activities
(4,421)
(3,502)
Net increase (decrease) in cash and cash equivalents and restricted cash
1,230
(1,707)
Cash and cash equivalents and restricted cash beginning of year
5,400
50,932
Cash and Cash Equivalents and Restricted Cash End of Period
$
6,630
$
49,225
See Notes to Consolidated Financial Statements.
AT&T INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars and shares in millions except per share amounts
(Unaudited)
March 31, 2019
March 31, 2018
Shares
Amount
Shares
Amount
Common Stock
Balance at beginning of year
7,621
$
7,621
6,495
$
6,495
Issuance of stock
-
-
-
-
Balance at end of period
7,621
$
7,621
6,495
$
6,495
Additional Paid-In Capital
Balance at beginning of year
$
125,525
$
89,563
Issuance of treasury stock
(77)
(4)
Share-based payments
(274)
(155)
Balance at end of period
$
125,174
$
89,404
Retained Earnings
Balance at beginning of year
$
58,753
$
50,500
Net income attributable to AT&T ($0.56 and $0.75
per diluted share)
4,096
4,662
Dividends to stockholders ($0.51 and $0.50 per share)
(3,741)
(3,092)
Cumulative effect of accounting changes
316
2,997
Balance at end of period
$
59,424
$
55,067
Treasury Stock
Balance at beginning of year
(339)
$
(12,059)
(356)
$
(12,714)
Repurchase and acquisition of common stock
(7)
(208)
(4)
(164)
Issuance of treasury stock
22
815
12
446
Balance at end of period
(324)
$
(11,452)
(348)
$
(12,432)
Accumulated Other Comprehensive Income
Attributable to AT&T, net of tax
Balance at beginning of year
$
4,249
$
7,017
Other comprehensive income attributable to AT&T
96
1,024
Amounts reclassified to retained earnings
-
(655)
Balance at end of period
$
4,345
$
7,386
Noncontrolling Interest
Balance at beginning of year
$
9,795
$
1,146
Net income attributable to noncontrolling interest
252
97
Interest acquired by noncontrolling owners
9
-
Distributions
(246)
(124)
Translation adjustments attributable to noncontrolling
interest, net of taxes
-
2
Cumulative effect of accounting changes
29
35
Balance at end of period
$
9,839
$
1,156
Total Stockholders' Equity at beginning of year
$
193,884
$
142,007
Total Stockholders' Equity at end of period
$
194,951
$
147,076
See Notes to Consolidated Financial Statements.
NOTE 1. PREPARATION OF INTERIM FINANCIAL STATEMENTS
Basis of Presentation Throughout this document, AT&T Inc. is referred to as "we," "AT&T" or the "Company." The consolidated financial statements include the accounts of the Company and subsidiaries and affiliates which we control, including the operating results of Warner Media, LLC (formerly Time Warner Inc. and referred to as "Time Warner" or "WarnerMedia"), which was acquired on June 14, 2018 (see Note 8). AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this document in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results for the interim periods are not necessarily indicative of those for the full year. These consolidated financial statements include all adjustments that are necessary to present fairly the results for the presented interim periods, consisting of normal recurring accruals and other items.
All significant intercompany transactions are eliminated in the consolidation process. Investments in subsidiaries and partnerships which we do not control but have significant influence are accounted for under the equity method. Earnings from certain investments accounted for using the equity method are included for periods ended within up to one quarter of our period end. We also record our proportionate share of our equity method investees' other comprehensive income (OCI) items.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results could differ from those estimates. Certain prior period amounts have been conformed to the current period's presentation.
In the tables throughout this document, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Adopted Accounting Standards and Other Changes
Leases As of January 1, 2019, we adopted, with modified retrospective application, Accounting Standards Update (ASU) No. 2016-02, "Leases (Topic 842)," as modified (ASC 842), which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements (see Note 10). ASC 842 requires lessees to recognize most leases on their balance sheets as liabilities, with corresponding "right-of-use" assets. For income statement recognition purposes, leases are classified as either a finance or an operating lease without relying upon bright-line tests.
The key change upon adoption of the standard was balance sheet recognition, given that the recognition of lease expense on our income statement is similar to our current accounting. Using the modified retrospective transition method of adoption, we did not adjust the balance sheet for comparative periods but recorded a cumulative effect adjustment to retained earnings on January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward our historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements that were not accounted for as leases. We excluded all the leases with original terms of one year or less. Additionally, we elected to not separate lease and non-lease components for certain classes of assets in arrangements where we are the lessee and for certain classes of assets where we are the lessor. Our accounting for finance leases did not change from our prior accounting for capital leases.
The adoption of ASC 842 resulted in the recognition of an operating lease liability of $22,121 and an operating right-of-use asset of the same amount. Existing prepaid and deferred rent accruals were recorded as an offset to the right-of-use asset, resulting in a net asset of $20,960. The cumulative effect of the adoption to retained earnings was an increase of $316 reflecting the reclassification of deferred gains related to sale/leaseback transactions. We do not believe the standard will materially impact our future income statements or have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.
Deferral of Episodic Television and Film Costs In March 2019, the FASB issued ASU No. 2019-02, "Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials" (ASU 2019-02), which we early adopted as of January 1, 2019, with prospective application. The standard eliminates certain revenue-related constraints on capitalization of inventory costs for episodic television that existed under prior guidance. In addition, the balance sheet classification requirements that existed in prior guidance for film production costs and programming inventory were eliminated. As of January 1, 2019, we reclassified $2,274 of our programming inventory costs from "Other current assets" to "Other Assets" in accordance with the guidance. This change in accounting does not materially impact our income statement.
Spectrum Licenses in Mexico During the first quarter of 2019, in conjunction with the renewal process of certain spectrum licenses in Mexico, we reassessed the estimated economic lives and renewal assumptions for these licenses. As a result, we have changed the life of these licenses from indefinite to finite-lived. On January 1, 2019, we began amortizing our spectrum licenses in Mexico over their average remaining economic life of 25 years. This change in accounting does not materially impact our income statement.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted earnings per share for the three months ended March 31, 2019 and 2018, is shown in the table below:
Three months ended
March 31,
2019
2018
Numerators
Numerator for basic earnings per share:
Net Income
$
4,348
$
4,759
Less: Net income attributable to noncontrolling interest
(252)
(97)
Net Income attributable to AT&T
4,096
4,662
Dilutive potential common shares:
Share-based payment
6
5
Numerator for diluted earnings per share
$
4,102
$
4,667
Denominators (000,000)
Denominator for basic earnings per share:
Weighted average number of common shares outstanding
7,313
6,161
Dilutive potential common shares:
Share-based payment (in shares)
29
19
Denominator for diluted earnings per share
7,342
6,180
Basic earnings per share attributable to AT&T
$
0.56
$
0.75
Diluted earnings per share attributable to AT&T
$
0.56
$
0.75
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated OCI are presented below. All amounts are net of tax and exclude noncontrolling interest.
Foreign Currency Translation Adjustment
Net Unrealized Gains (Losses) on Securities
Net Unrealized Gains (Losses) on Derivative Instruments
Defined Benefit Postretirement Plans
Accumulated Other Comprehensive Income
Balance as of December 31, 2018
$
(3,084)
$
(2)
$
818
$
6,517
$
4,249
Other comprehensive income
(loss) before reclassifications
288
16
127
-
431
Amounts reclassified
from accumulated OCI
-
-
11
1
(346)
2
(335)
Net other comprehensive
income (loss)
288
16
138
(346)
96
Balance as of March 31, 2019
$
(2,796)
$
14
$
956
$
6,171
$
4,345
Foreign Currency Translation Adjustment
Net Unrealized Gains (Losses) on Securities
Net Unrealized Gains (Losses) on Derivative Instruments
Defined Benefit Postretirement Plans
Accumulated Other Comprehensive Income
Balance as of December 31, 2017
$
(2,054)
$
660
$
1,402
$
7,009
$
7,017
Other comprehensive income
(loss) before reclassifications
106
(12)
674
567
1,335
Amounts reclassified
from accumulated OCI
-
-
12
1
(323)
2
(311)
Net other comprehensive
income (loss)
106
(12)
686
244
1,024
Amounts reclassified
to retained earnings
-
(655)
3
-
-
(655)
Balance as of March 31, 2018
$
(1,948)
$
(7)
$
2,088
$
7,253
$
7,386
1
(Gains) losses are included in Interest expense in the consolidated statements of income (see Note 7).
2
The amortization of prior service credits associated with postretirement benefits are included in Other income (expense) in the
consolidated statements of income (see Note 6).
3
With the adoption of ASU 2016-01, the unrealized (gains) losses on our equity investments are reclassified to retained earnings.
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer products and services to different customer segments over various technology platforms and/or in different geographies that are managed accordingly. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items (as discussed below), and equity in net income (loss) of affiliates for investments managed within each segment. We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America, and (4) Xandr.
We also evaluate segment and business unit performance based on EBITDA and/or EBITDA margin, which is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization. We believe EBITDA to be a relevant and useful measurement to our investors as it is part of our internal management reporting and planning processes and it is an important metric that management uses to evaluate operating performance. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA margin is EBITDA divided by total revenues.
The Communications segment provides wireless and wireline telecom, video and broadband services to consumers located in the U.S. or in U.S. territories and businesses globally. This segment contains the following business units:
· Mobility provides nationwide wireless service and equipment.
· Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.
· Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.
The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content in various physical and digital formats globally. Historical financial results from AT&T's Regional Sports Networks (RSNs) and equity investments (predominantly Game Show Network and Otter Media), previously included in Entertainment Group, have been reclassified into the WarnerMedia segment and are combined with the Time Warner operations for the period subsequent to our acquisition on June 14, 2018. This segment contains the following business units:
· Turner is comprised of the historic Turner division as well as the financial results of our RSNs. This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.
· Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.
· Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.
The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:
· Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.
· Mexico provides wireless service and equipment to customers in Mexico.
The Xandr segment provides advertising services and includes AppNexus, an advertising technology company we acquired in August 2018. Xander services utilize data insights to develop and deliver targeted advertising across video and digital platforms. Certain revenues in this segment are also reported by the Communications segment and are eliminated upon consolidation.
Corporate and Other reconcile our segment results to consolidated operating income and income before income taxes, and include:
· Corporate, which consists of: (1) businesses no longer integral to our operations or which we no longer actively market, (2) corporate support functions, (3) impacts of corporate-wide decisions for which the individual operating segments are not being evaluated, (4) the reclassification of the amortization of prior service credits, which we continue to report with segment operating expenses, to consolidated other income (expense)-net and (5) the recharacterization of $150 of programming intangible asset amortization, for released programming acquired in the Time Warner acquisition, which we continue to report within WarnerMedia segment operating expense, to consolidated amortization expense.
· Acquisition-related items which consists of items associated with the merger and integration of acquired businesses, including amortization of intangible assets.
· Certain significant items includes (1) employee separation charges associated with voluntary and/or strategic offers, (2) losses resulting from abandonment or impairment of assets and (3) other items for which the segments are not being evaluated.
· Eliminations and consolidations, which (1) removes transactions involving dealings between our segments, including content licensing between WarnerMedia and Communications, and (2) includes adjustments for our reporting of the advertising business.
Interest expense and other income (expense) - net, are managed only on a total company basis and are, accordingly, reflected only in consolidated results.
For the three months ended March 31, 2019
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization
Operating
Income (Loss)
Equity in Net
Income (Loss) of
Affiliates
Segment
Contribution
Communications
Mobility
$
17,567
$
10,181
$
7,386
$
2,035
$
5,351
$
-
$
5,351
Entertainment Group
11,328
8,527
2,801
1,323
1,478
-
1,478
Business Wireline
6,498
4,040
2,458
1,235
1,223
-
1,223
Total Communications
35,393
22,748
12,645
4,593
8,052
-
8,052
WarnerMedia
Turner
3,443
2,136
1,307
60
1,247
25
1,272
Home Box Office
1,510
921
589
22
567
15
582
Warner Bros.
3,518
2,919
599
52
547
6
553
Other
(92)
17
(109)
9
(118)
21
(97)
Total WarnerMedia
8,379
5,993
2,386
143
2,243
67
2,310
Latin America
Vrio
1,067
866
201
169
32
-
32
Mexico
651
725
(74)
131
(205)
-
(205)
Total Latin America
1,718
1,591
127
300
(173)
-
(173)
Xandr
426
160
266
13
253
-
253
Segment Total
45,916
30,492
15,424
5,049
10,375
$
67
$
10,442
Corporate and Other
Corporate
209
513
(304)
169
(473)
Acquisition-related items
(42)
73
(115)
1,988
(2,103)
Certain significant items
-
248
(248)
-
(248)
Eliminations and consolidations
(1,256)
(938)
(318)
-
(318)
AT&T Inc.
$
44,827
$
30,388
$
14,439
$
7,206
$
7,233
For the three months ended March 31, 2018
Revenues
Operations
and Support
Expenses
EBITDA
Depreciation
and
Amortization
Operating
Income (Loss)
Equity in Net
Income (Loss) of
Affiliates
Segment
Contribution
Communications
Mobility
$
17,355
$
10,102
$
7,253
$
2,095
$
5,158
$
-
$
5,158
Entertainment Group
11,431
8,811
2,620
1,310
1,310
(1)
1,309
Business Wireline
6,747
4,016
2,731
1,170
1,561
(1)
1,560
Total Communications
35,533
22,929
12,604
4,575
8,029
(2)
8,027
WarnerMedia
Turner
112
74
38
1
37
27
64
Home Box Office
-
-
-
-
-
-
-
Warner Bros.
-
-
-
-
-
-
-
Other
-
8
(8)
-
(8)
(17)
(25)
Total WarnerMedia
112
82
30
1
29
10
39
Latin America
Vrio
1,354
1,001
353
205
148
-
148
Mexico
671
803
(132)
127
(259)
-
(259)
Total Latin America
2,025
1,804
221
332
(111)
-
(111)
Xandr
337
50
287
1
286
-
286
Segment Total
38,007
24,865
13,142
4,909
8,233
$
8
$
8,241
Corporate and Other
Corporate
333
735
(402)
23
(425)
Acquisition-related items
-
67
(67)
1,062
(1,129)
Certain significant items
-
180
(180)
-
(180)
Eliminations and consolidations
(302)
(4)
(298)
-
(298)
AT&T Inc.
$
38,038
$
25,843
$
12,195
$
5,994
$
6,201
The following table is a reconciliation of Segment Contributions to "Income Before Income Taxes" reported on our consolidated statements of income.
Three months ended
March 31,
2019
2018
Communications
$
8,052
$
8,027
WarnerMedia
2,310
39
Latin America
(173)
(111)
Xandr
253
286
Segment Contribution
10,442
8,241
Reconciling Items:
Corporate and Other
(473)
(425)
Merger and integration items
(115)
(67)
Amortization of intangibles acquired
(1,988)
(1,062)
Employee separation charges
(248)
(51)
Natural disaster items
-
(104)
Foreign currency devaluation
-
(25)
Segment equity in net income of affiliates
(67)
(8)
Eliminations and consolidations
(318)
(298)
AT&T Operating Income
7,233
6,201
Interest Expense
2,141
1,771
Equity in net income (loss) of affiliates
(7)
9
Other income (expense) - net
286
1,702
Income Before Income Taxes
$
5,371
$
6,141
The following table presents intersegment revenues by segment.
Intersegment Reconciliation
Three months ended
March 31,
2019
2018
Intersegment revenues
Communications
$
-
$
-
WarnerMedia
858
31
Latin America
-
-
Xandr
-
-
Total Intersegment Revenues
858
31
Consolidations
398
271
Eliminations and consolidations
$
1,256
$
302
NOTE 5. REVENUE RECOGNITION
Revenue Categories
The following tables set forth reported revenue by category:
For the three months ended March 31, 2019
Service Revenues
Wireless
Advanced Data
Legacy Voice & Data
Subscription
Content
Advertising
Other
Equipment
Total
Communications
Mobility
$
13,725
$
-
$
-
$
-
$
-
$
67
$
-
$
3,775
$
17,567
Entertainment Group
-
2,070
683
7,724
-
350
501
-
11,328
Business Wireline
-
3,186
2,404
-
-
-
749
159
6,498
WarnerMedia
Turner
-
-
-
1,965
135
1,261
82
-
3,443
Home Box Office
-
-
-
1,334
173
-
3
-
1,510
Warner Bros.
-
-
-
21
3,332
10
155
-
3,518
Eliminations and Other
-
-
-
49
(152)
8
3
-
(92)
Latin America
Vrio
-
-
-
1,067
-
-
-
-
1,067
Mexico
442
-
-
-
-
-
-
209
651
Xandr
-
-
-
-
-
426
-
-
426
Corporate and Other
-
-
-
-
-
-
167
-
167
Eliminations and
consolidations
-
-
-
-
(837)
(350)
(69)
-
(1,256)
Total Operating Revenues
$
14,167
$
5,256
$
3,087
$
12,160
$
2,651
$
1,772
$
1,591
$
4,143
$
44,827
For the three months ended March 31, 2018
Service Revenues
Wireless
Advanced Data
Legacy Voice & Data
Subscription
Content
Advertising
Other
Equipment
Total
Communications
Mobility
$
13,362
$
-
$
-
$
-
$
-
$
41
$
-
$
3,952
$
17,355
Entertainment Group
-
1,878
806
7,891
-
334
519
3
11,431
Business Wireline
-
3,043
2,865
-
-
-
669
170
6,747
WarnerMedia
Turner
-
-
-
98
-
14
-
-
112
Home Box Office
-
-
-
-
-
-
-
-
-
Warner Bros.
-
-
-
-
-
-
-
-
-
Eliminations and Other
-
-
-
-
-
-
-
-
-
Latin America
Vrio
-
-
-
1,354
-
-
-
-
1,354
Mexico
404
-
-
-
-
-
-
267
671
Xandr
-
-
-
-
-
337
-
-
337
Corporate and Other
-
-
-
-
-
-
333
-
333
Eliminations and
consolidations
-
-
-
-
-
(334)
32
-
(302)
Total Operating Revenues
$
13,766
$
4,921
$
3,671
$
9,343
$
-
$
392
$
1,553
$
4,392
$
38,038
Deferred Customer Contract Acquisition and Fulfillment Costs
Costs to acquire customer contracts, including commissions on service activations, for our wireless, business wireline and video entertainment services, are deferred and amortized over the contract period or expected customer relationship life, which typically ranges from two to five years. Costs to fulfill customer contracts are deferred and amortized over periods ranging generally from four to five years, reflecting the estimated economic lives of the respective customer relationships, subject to an assessment of the recoverability of such costs. For contracts with an estimated amortization period of less than one year, we expense incremental costs immediately.
Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $4,297 and $11,592 as of March 31, 2019, respectively, of which $2,143 and $4,214 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2019, we amortized $547 and $1,098 of these costs, respectively.
Our deferred customer contract acquisition costs and deferred customer contract fulfillment costs balances were $3,974 and $11,540 as of December 31, 2018, respectively, of which $1,901 and $4,090 were included in Other current assets on our consolidated balance sheets. For the three months ended March 31, 2018, we amortized $263 and $1,047 of these costs, respectively.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of our right to bill and receive consideration (i.e., we must perform additional services or satisfy another performance obligation in order to bill and receive consideration). The contract asset will decrease as services are provided and billed. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded. Reductions in the contract liability will be recorded as we satisfy the performance obligations.
The following table presents contract assets and liabilities at March 31, 2019 and December 31, 2018:
March 31,
December 31,
2019
2018
Contract asset
$
2,198
$
1,896
Contract liability
6,899
6,856
Our beginning of period contract liability recorded as customer contract revenue during 2019 was $4,379.
Our consolidated balance sheets at March 31, 2019 and December 31, 2018 included approximately $1,462 and $1,244, respectively, for the current portion of our contract asset in "Other current assets" and $5,715 and $5,752, respectively, for the current portion of our contract liability in "Advanced billings and customer deposits."
Remaining Performance Obligations
Remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. In determining the transaction price allocated, we do not include non-recurring charges and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year, which are primarily prepaid wireless, video and residential internet agreements.
Remaining performance obligations associated with business contracts reflect recurring charges billed, adjusted to reflect estimates for sales incentives and revenue adjustments. Performance obligations associated with wireless contracts are estimated using a portfolio approach in which we review all relevant promotional activities, calculating the remaining performance obligation using the average service component for the portfolio and the average device price. As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $39,627 of which we expect to recognize approximately 80% by the end of 2020, with the balance recognized thereafter.
NOTE 6. PENSION AND POSTRETIREMENT BENEFITS
Many of our employees are covered by one of our noncontributory pension plans. We also provide certain medical, dental, life insurance and death benefits to certain retired employees under various plans and accrue actuarially determined postretirement benefit costs. Our objective in funding these plans, in combination with the standards of the Employee Retirement Income Security Act of 1974, as amended (ERISA), is to accumulate assets sufficient to provide benefits described in the plans to employees upon their retirement.
During the quarter, for certain management participants in our pension plan who terminated employment before April 1, 2019, we offered the option of more favorable 2018 interest rates and mortality basis for determining lump-sum distributions. For the quarter ended March 31, 2019 we recorded special termination benefits of $93 associated with this offer in "Other income (expense) - net." During the first quarter, we also committed to a plan to offer certain terminated vested pension plan participants the opportunity to receive their benefit in a lump-sum amount.
We recognize actuarial gains and losses on pension and postretirement plan assets in our consolidated results as a component of other income (expense) - net at our annual measurement date of December 31, unless earlier remeasurements are required. We anticipate total distributions from the pension plan will exceed the threshold of service and interest costs for 2019, requiring us to follow settlement accounting. We have remeasured our pension benefit obligations at March 31, 2019, and will remeasure our pension benefit obligation at each quarter-end of 2019 as we expect settlements to occur during each quarter.
As part of our first-quarter 2019 remeasurement, we decreased the weighted-average discount rate used to measure our pension benefit obligation from 4.50% to 4.10%. The discount rate in effect for determining pension service and interest costs after remeasurement is 4.30% and 3.70%, respectively. The remeasurement reflects an actual return on plan assets of 5.80% (quarterly rate) relative to our expected long-term rate of 7.00% (annual rate).
The following table details pension and postretirement benefit costs included in the accompanying consolidated statements of income. The service cost component of net periodic pension cost (benefit) is recorded in operating expenses in the consolidated statements of income while the remaining components are recorded in "Other income (expense) - net."
Three months ended
March 31,
2019
2018
Pension cost:
Service cost - benefits earned during the period
$
240
$
291
Interest cost on projected benefit obligation
549
487
Expected return on assets
(851)
(760)
Amortization of prior service credit
(33)
(30)
Actuarial (gain) loss
432
-
Net pension (credit) cost
$
337
$
(12)
Postretirement cost:
Service cost - benefits earned during the period
$
18
$
29
Interest cost on accumulated postretirement benefit obligation
186
191
Expected return on assets
(56)
(77)
Amortization of prior service credit
(426)
(397)
Actuarial (gain) loss
-
(930)
Net postretirement (credit) cost
$
(278)
$
(1,184)
Combined net pension and postretirement (credit) cost
$
59
$
(1,196)
We also provide senior- and middle-management employees with nonqualified, unfunded supplemental retirement and savings plans. For the first quarter ended 2019 and 2018, net supplemental pension benefits costs not included in the table above were $25 and $21.
NOTE 7. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Our valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values. We believe our valuation methods are appropriate and consistent with other market participants. The use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used since December 31, 2018.
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial instruments, are summarized as follows:
March 31, 2019
December 31, 2018
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
Notes and debentures1
$
170,532
$
179,576
$
171,529
$
172,287
Commercial paper
2,957
2,957
3,048
3,048
Bank borrowings
4
4
4
4
Investment securities2
3,606
3,606
3,409
3,409
1
Includes credit agreement borrowings.
2
Excludes investments accounted for under the equity method.
The carrying amount of debt with an original maturity of less than one year approximates market value. The fair value measurements used for notes and debentures are considered Level 2 and are determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for investment securities that are measured at fair value and derivatives as of March 31, 2019 and December 31, 2018. Derivatives designated as hedging instruments are reflected as "Other assets," "Other noncurrent liabilities" and, for a portion of interest rate swaps, "Other current assets" on our consolidated balance sheets.
March 31, 2019
Level 1
Level 2
Level 3
Total
Equity Securities
Domestic equities
$
1,092
$
-
$
-
$
1,092
International equities
263
-
-
263
Fixed income equities
208
-
-
208
Available-for-Sale Debt Securities
-
989
-
989
Asset Derivatives
Interest rate swaps
-
2
-
2
Cross-currency swaps
-
427
-
427
Foreign exchange contracts
-
87
-
87
Liability Derivatives
Interest rate swaps
-
(13)
-
(13)
Cross-currency swaps
-
(2,697)
-
(2,697)
Foreign exchange contracts
-
(6)
-
(6)
December 31, 2018
Level 1
Level 2
Level 3
Total
Equity Securities
Domestic equities
$
1,061
$
-
$
-
$
1,061
International equities
256
-
-
256
Fixed income equities
172
-
-
172
Available-for-Sale Debt Securities
-
870
-
870
Asset Derivatives
Cross-currency swaps
-
472
-
472
Foreign exchange contracts
-
87
-
87
Liability Derivatives
Interest rate swaps
-
(39)
-
(39)
Cross-currency swaps
-
(2,563)
-
(2,563)
Foreign exchange contracts
-
(2)
-
(2)
Investment Securities
Our investment securities include both equity and debt securities that are measured at fair value, as well as equity securities without readily determinable fair values. A substantial portion of the fair values of our investment securities are estimated based on quoted market prices. Investments in equity securities not traded on a national securities exchange are valued at cost, less any impairment, and adjusted for changes resulting from observable, orderly transactions for identical or similar securities. Investments in debt securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
The components comprising total gains and losses on equity securities are as follows:
Three months ended
March 31,
2019
2018
Total gains (losses) recognized on equity securities
$
160
$
(13)
Gains (Losses) recognized on equity securities sold
86
52
Unrealized gains (losses) recognized on equity securities held at end of period
74
(65)
At March 31, 2019, available-for-sale debt securities totaling $989 have maturities as follows - less than one year: $46; one to three years: $178; three to five years: $98; for five or more years: $667.
Our cash equivalents (money market securities), short-term investments (certificate and time deposits) and nonrefundable customer deposits are recorded at amortized cost, and the respective carrying amounts approximate fair values. Short-term investments and nonrefundable customer deposits are recorded in "Other current assets" and our investment securities are recorded in "Other Assets" on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain market risks, primarily interest rate risk and foreign currency exchange risk. This includes the use of interest rate swaps, interest rate locks, foreign exchange forward contracts and combined interest rate foreign exchange contracts (cross-currency swaps). We do not use derivatives for trading or speculative purposes. We record derivatives on our consolidated balance sheets at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2). Cash flows associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the item being hedged.
Fair Value Hedging We designate our fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and floating-rate debt. These swaps involve the receipt of fixed-rate amounts for floating interest rate payments over the life of the swaps without exchange of the underlying principal amount.
We also designate some of our foreign exchange contracts as fair value hedges. The purpose of these contracts is to hedge currency risk associated with foreign-currency-denominated operating assets and liabilities.
Accrued and realized gains or losses from fair value hedges impact the same category on the consolidated statements of income as the item being hedged. Unrealized gains on fair value hedges are recorded at fair market value as assets, and unrealized losses are recorded at fair market value as liabilities. Changes in the fair value of derivative instruments designated as fair value hedges are offset against the change in fair value of the hedged assets or liabilities through earnings. In the three months ended March 31, 2019 and 2018, no ineffectiveness was measured on fair value hedges.
Cash Flow Hedging We designate our cross-currency swaps as cash flow hedges. We have entered into multiple cross-currency swaps to hedge our exposure to variability in expected future cash flows that are attributable to foreign currency risk generated from the issuance of our foreign-denominated debt. These agreements include initial and final exchanges of principal from fixed foreign currency denominated amounts to fixed U.S. dollar denominated amounts, to be exchanged at a specified rate that is usually determined by the market spot rate upon issuance. They also include an interest rate swap of a fixed or floating foreign currency-denominated interest rate to a fixed U.S. dollar denominated interest rate.
We also designate some of our foreign exchange contracts as cash flow hedges. The purpose of these contracts is to hedge currency risk associated with variability in anticipated foreign-currency-denominated cash flows, such as unremitted or forecasted royalty and license fees owed to WarnerMedia's domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency.
Unrealized gains on derivatives designated as cash flow hedges are recorded at fair value as assets, and unrealized losses are recorded at fair value as liabilities. For derivative instruments designated as cash flow hedges, the effective portion is reported as a component of accumulated OCI until reclassified into the consolidated statements of income in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion is recognized as "Other income (expense) - net" in the consolidated statements of income in each period. We evaluate the effectiveness of our cash flow hedges each quarter. In the three months ended March 31, 2019 and 2018, no ineffectiveness was measured on cash flow hedges.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to "Other income (expense) - net" in the consolidated statements of income. Over the next 12 months, we expect to reclassify $63 from accumulated OCI to interest expense due to the amortization of net losses on historical interest rate locks.
Net Investment Hedging We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.
Collateral and Credit-Risk Contingency We have entered into agreements with our derivative counterparties establishing collateral thresholds based on respective credit ratings and netting agreements. At March 31, 2019, we had posted collateral of $334 (a deposit asset) and held collateral of $166 (a receipt liability). Under the agreements, if AT&T's credit rating had been downgraded one rating level by Fitch Ratings, before the final collateral exchange in March, we would have been required to post additional collateral of $175. If AT&T's credit rating had been downgraded four ratings levels by Fitch Ratings, two levels by S&P, and two levels by Moody's, we would have been required to post additional collateral of $1,360. If DIRECTV Holdings LLC's credit rating had been downgraded below BBB- by S&P, we would have been required to post additional collateral of $258. At December 31, 2018, we had posted collateral of $1,675 (a deposit asset) and held collateral of $103 (a receipt liability). We do not offset the fair value of collateral, whether the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) exists, against the fair value of the derivative instruments.
Following are the notional amounts of our outstanding derivative positions:
March 31,
December 31,
2019
2018
Interest rate swaps
$
1,633
$
3,483
Cross-currency swaps
42,192
42,192
Foreign exchange contracts
1,238
2,094
Total
$
45,063
$
47,769
Following are the related hedged items affecting our financial position and performance:
Effect of Derivatives on the Consolidated Statements of Income
Three months ended
March 31,
Fair Value Hedging Relationships
2019
2018
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps
$
24
$
(53)
Gain (Loss) on long-term debt
(24)
53
In addition, the net swap settlements that accrued and settled in the quarter ended March 31 were offset against interest expense.
Three months ended
March 31,
Cash Flow Hedging Relationships
2019
2018
Cross-currency swaps:
Gain (Loss) recognized in accumulated OCI
$
168
$
854
Foreign exchange contracts:
Gain (Loss) recognized in accumulated OCI
(7)
-
Other income (expense) - net reclassified from
accumulated OCI into income
3
-
Interest rate locks:
Interest income (expense) reclassified from
accumulated OCI into income
(16)
(15)
NOTE 8. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
Time Warner On June 14, 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. The deal combines Time Warner's vast library of content and ability to create new premium content for audiences around the world with our extensive customer relationships and distribution, one of the world's largest pay-TV subscriber bases and scale in TV, mobile and broadband distribution. We expect that the transaction will advance our direct-to-consumer efforts and provide us with the ability to develop innovative new offerings.
In July 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court's decision permitting the merger. On February 26, 2019, the D.C. Circuit unanimously affirmed our win. AT&T's representations to the DOJ regarding its operation of Turner expired on February 28, 2019. The DOJ did not ask the D.C. Circuit to rehear its appeal before the applicable April 12, 2019 deadline, and it stated publicly on February 26, 2018 that "[t]he department has no plans to seek further review" of the D.C. Circuit's decision. The DOJ's deadline to file a petition for writ of certiorari with the United States Supreme Court is May 28, 2019.
We paid Time Warner shareholders $36,599 in AT&T stock and $42,100 in cash. Total consideration, including share-based payment arrangements and other adjustments totaled $79,358, excluding Time Warner's net debt at acquisition. The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820, "Fair Value Measurement," other than cash and long-term debt acquired in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of distribution network, released TV and film content, in-place advertising network, trade names, and franchises. The income approach estimates fair value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.
The following table summarizes the preliminary estimated fair values of the Time Warner assets acquired and liabilities assumed and related deferred income taxes as of the acquisition date:
Assets acquired
Cash
$
1,889
Accounts receivable
9,052
All other current assets
2,913
Noncurrent inventory and theatrical film and television production costs
5,591
Property, plant and equipment
4,785
Intangible assets subject to amortization
Distribution network
18,040
Released television and film content
10,806
Trademarks and trade names
18,081
Other
10,300
Investments and other assets
9,449
Goodwill
38,569
Total assets acquired
129,475
Liabilities assumed
Current liabilities, excluding current portion of long-term debt
8,303
Debt maturing within one year
4,471
Long-term debt
18,394
Other noncurrent liabilities
18,948
Total liabilities assumed
50,116
Net assets acquired
79,359
Noncontrolling interest
(1)
Aggregate value of consideration paid
$
79,358
These estimates are preliminary in nature and subject to adjustments, which could be material. Any necessary adjustments will be finalized within one year from the date of acquisition. Substantially all the receivables acquired are expected to be collectible. We have not identified any material unrecorded pre-acquisition contingencies where the related asset or liability, or an impairment is probable and the amount can be reasonably estimated. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Purchased goodwill is not expected to be deductible for tax purposes. As we finalize the valuation of assets acquired and liabilities assumed, we will determine to which reporting units within the WarnerMedia segment any changes in goodwill should be recorded.
NOTE 9. SALES OF RECEIVABLES
As described further below, we have agreements with various third-party financial institutions pertaining to the sale of certain types of our accounts receivable. The most significant of these programs are discussed in detail below and generally consist of (1) receivables arising from equipment installment plans, which are sold for cash and a deferred purchase price, and (2) receivables related to licensed programming and advertising. Under these programs, we transfer receivables to purchasers in exchange for cash and additional consideration upon settlement of the receivables, where applicable. Under the terms of our agreements for these programs, we continue to bill and collect the payments from our customers on behalf of the financial institutions.
As of March 31, 2019 and December 31, 2018, gross receivables included on our consolidated balance sheets, related to these programs, are $6,611 and $5,994, respectively, of which $3,072 and $3,457 are notes receivable that are included in "Accounts receivable - net."
The outstanding portfolio of receivables derecognized from our consolidated balance sheets, but which we continue to service, was $10,863 and $9,065 at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, total cash proceeds received, net of remittances (excluding amounts returned as deferred purchase price), were $8,387.
The following table sets forth a summary of receivables sold during the three months ended March 31, 2019 and 2018:
Three months ended
March 31,
2019
2018
Gross receivables sold
$
4,101
$
3,010
Net receivables sold1
3,909
2,795
Cash proceeds received
3,675
2,395
Deferred purchase price recorded
309
519
Guarantee obligation recorded
138
123
1
Receivables net of allowance, imputed interest and trade-in right guarantees.
The sales of receivables did not have a material impact on our consolidated statements of income or to "Total Assets" reported on our consolidated balance sheets. We reflect cash receipts on sold receivables as cash flows from operations in our consolidated statements of cash flows. Cash receipts on the deferred purchase price are classified as cash flows from investing activities.
Equipment Installment Receivables
We offer our customers the option to purchase certain wireless devices in installments over a specified period of time and, in many cases, once certain conditions are met, they may be eligible to trade in the original equipment for a new device and have the remaining unpaid balance paid or settled.
We maintain a program, under which we transfer a portion of these receivables in exchange for cash and additional consideration upon settlement of the receivables, referred to as the deferred purchase price. In the event a customer trades in a device prior to the end of the installment contract period, we agree to make a payment to the financial institutions equal to any outstanding remaining installment receivable balance. Accordingly, we record a guarantee obligation for this estimated amount at the time the receivables are transferred.
The deferred purchase price and guarantee obligation are initially recorded at estimated fair value and subsequently carried at the lower of cost or net realizable value. The estimation of their fair values is based on remaining installment payments expected to be collected and the expected timing and value of device trade-ins. The estimated value of the device trade-ins considers prices offered to us by independent third parties that contemplate changes in value after the launch of a device model. The fair value measurements used for the deferred purchase price and the guarantee obligation are considered Level 3 under the Fair Value Measurement and Disclosure framework (see Note 7).
The following table shows the previously transferred equipment installment receivables, which we repurchased in exchange for the associated deferred purchase price and cash during the three months ended March 31, 2019 and 2018:
Three months ended
March 31,
2019
2018
Fair value of repurchased receivables
$
423
$
-
Carrying value of deferred purchase price
407
-
Gain (loss) on repurchases1
$
16
$
-
1
These gains (losses) are included in "Selling, general and administrative" in the consolidated statements of income.
At March 31, 2019 and December 31, 2018, our deferred purchase price receivable was $2,240 and $2,370, respectively, of which $1,418 and $1,448 are included in "Other current assets" on our consolidated balance sheets, with the remainder in "Other Assets." The guarantee obligation at March 31, 2019 and December 31, 2018 was $430 and $439, respectively, of which $160 and $196 are included in "Accounts payable and accrued liabilities" on our consolidated balance sheets, with the remainder in "Other noncurrent liabilities." Our maximum exposure to loss as a result of selling these equipment installment receivables is limited to the total amount of our deferred purchase price and guarantee obligation.
Programing and Advertising Receivables
In March 2019, we entered into a revolving agreement to transfer certain receivables from our WarnerMedia business to various financial institutions in exchange for cash. These receivables originate from the sale of licensed programing and advertising. Upon sale, we reclassify the allowance against these receivables to a guarantee liability. We have fully guaranteed the repayment of the transferred receivables and have also pledged, as collateral under this agreement, additional receivables in the amount of $1,402. Our maximum exposure to loss related to selling these receivables is limited to the outstanding $1,400 of sold receivables.
NOTE 10. LEASES
We have operating and finance leases for certain facilities and equipment used in operations. Our leases have remaining lease terms of 1 year to 13 years. Some of our real estate operating leases contain renewal options that may be exercised, and some of our leases include options to terminate the leases within one year.
We have recognized a right-of-use asset for both operating and finance leases, and an operating lease liability that represents the present value of our obligation to make payments over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. We use the unsecured borrowing rate and risk-adjust that rate to approximate a collateralized rate in the currency of the lease, which will be updated on a quarterly basis for measurement of new lease liabilities.
The components of lease expense were as follows:
Three months ended
March 31, 2019
Operating lease cost
$
1,242
Finance lease cost:
Amortization of right-of-use assets
$
66
Interest on lease obligation
42
Total finance lease cost
$
108
Supplemental balance sheet information related to leases is as follows:
At March 31, 2019
Operating Leases
Operating lease right-of-use assets
$
20,235
Accounts payable and accrued liabilities
$
3,072
Operating lease obligation
18,253
Total operating lease obligation
$
21,325
Finance Leases
Property, plant and equipment, at cost
$
3,377
Accumulated depreciation and amortization
(1,173)
Property, plant and equipment, net
$
2,204
Current portion of long-term debt
$
135
Long-term debt
1,852
Total finance lease obligation
$
1,987
Weighted-Average Remaining Lease Term
Operating leases
7.9
yrs
Finance leases
10.9
yrs
Weighted-Average Discount Rate
Operating leases
4.7
%
Finance leases
8.6
%
Future minimum maturities of lease liabilities are as follows:
At March 31, 2019
Operating
Finance
Leases
Leases
Remainder of 2019
$
3,201
$
246
2020
3,981
290
2021
3,533
279
2022
3,231
263
2023
2,893
254
Thereafter
9,633
1,828
Total lease payments
26,472
3,160
Less imputed interest
(5,147)
(1,173)
Total
$
21,325
$
1,987
NOTE 11. ADDITIONAL FINANCIAL INFORMATION
Cash and Cash Flows
We typically maintain our restricted cash balances for purchases and sales of certain investment securities and funding of certain deferred compensation benefit payments.
March 31,
December 31,
Cash and Cash Equivalents and Restricted Cash
2019
2018
2018
2017
Cash and cash equivalents
$
6,516
$
48,872
$
5,204
$
50,498
Restricted cash in Other current assets
20
8
61
6
Restricted cash in Other Assets
94
345
135
428
Cash and cash equivalents and restricted cash
$
6,630
$
49,225
$
5,400
$
50,932
Three months ended
March 31,
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:
2019
2018
Operating cash flows from operating leases
$
1,332
$
1,207
Three months ended
March 31,
Cash Paid (Received) During the Period for:
2019
2018
Interest
$
2,507
$
2,408
Income taxes, net of refunds
(379)
(1,089)
OVERVIEW
AT&T Inc. is referred to as "we," "AT&T" or the "Company" throughout this document, and the names of the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose subsidiaries and affiliates operate worldwide in the telecommunications, media and technology industries. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes (Notes). We completed the acquisition of Time Warner Inc. (Time Warner) on June 14, 2018, and have included its results after that date. In accordance with U.S. generally accepted accounting principles (GAAP), operating results from Time Warner prior to the acquisition are excluded.
We have four reportable segments: (1) Communications, (2) WarnerMedia, (3) Latin America and (4) Xandr. Our segment results presented in Note 4 and discussed below follow our internal management reporting. We analyze our segments based on segment operating contribution, which consists of operating income, excluding acquisition-related costs and other significant items, and equity in net income (loss) of affiliates for investments managed within each segment. Percentage increases and decreases that are not considered meaningful are denoted with a dash.
First Quarter
Percent
2019
2018
Change
Operating Revenues
Communications
$
35,393
$
35,533
(0.4)
%
WarnerMedia
8,379
112
-
Latin America
1,718
2,025
(15.2)
Xandr
426
337
26.4
Corporate and other
167
333
(49.8)
Eliminations and consolidation
(1,256)
(302)
-
AT&T Operating Revenues
44,827
38,038
17.8
Operating Contribution
Communications
8,052
8,027
0.3
WarnerMedia
2,310
39
-
Latin America
(173)
(111)
(55.9)
Xandr
253
286
(11.5)
Segment Operating Contribution
$
10,442
$
8,241
26.7
%
The Communications segment provides services to businesses and consumers located in the U.S. or in U.S. territories and businesses globally. Our business strategies reflect bundled product offerings that cut across product lines and utilize shared assets. This segment contains the following business units:
· Mobility provides nationwide wireless service and equipment.
· Entertainment Group provides video, including over-the-top (OTT) services, broadband and voice communications services primarily to residential customers. This segment also sells advertising on DIRECTV and U-verse distribution platforms.
· Business Wireline provides advanced IP-based services, as well as traditional voice and data services to business customers.
The WarnerMedia segment develops, produces and distributes feature films, television, gaming and other content over various physical and digital formats. This segment contains the following business units:
· Turner is comprised of the historic Turner division as well as the financial results of our AT&T's Regional Sports Networks (RSNs). This business unit primarily operates multichannel basic television networks and digital properties. Turner also sells advertising on its networks and digital properties.
· Home Box Office consists of premium pay television and OTT services domestically and premium pay, basic tier television and OTT services internationally, as well as content licensing and home entertainment.
· Warner Bros. consists of the production, distribution and licensing of television programming and feature films, the distribution of home entertainment products and the production and distribution of games.
The Latin America segment provides entertainment and wireless services outside of the U.S. This segment contains the following business units:
· Vrio provides video services primarily to residential customers using satellite technology in Latin America and the Caribbean.
· Mexico provides wireless service and equipment to customers in Mexico.
The Xandr segment provides advertising services and includes our recently acquired AppNexus. These services utilize data insights to develop and deliver targeted advertising across video and digital platforms.
RESULTS OF OPERATIONS
Consolidated Results Our financial results are summarized in the following discussions. Additional analysis is discussed in our "Segment Results" section. Percentage increases and decreases that are not considered meaningful are denoted with a dash. Certain prior period amounts have been reclassified to conform to the current period's presentation.
First Quarter
Percent
2019
2018
Change
Operating Revenues
Service
$
40,684
$
33,646
20.9
%
Equipment
4,143
4,392
(5.7)
Total Operating Revenues
44,827
38,038
17.8
Operating expenses
Operations and support
30,388
25,843
17.6
Depreciation and amortization
7,206
5,994
20.2
Total Operating Expenses
37,594
31,837
18.1
Operating Income
7,233
6,201
16.6
Interest expense
2,141
1,771
20.9
Equity in net income (loss)
of affiliates
(7)
9
-
Other income (expense) - net
286
1,702
(83.2)
Income Before Income Taxes
5,371
6,141
(12.5)
Net Income
4,348
4,759
(8.6)
Net Income Attributable to AT&T
$
4,096
$
4,662
(12.1)
%
Operating revenues increased in the first quarter of 2019. The increase was primarily due to our 2018 acquisition of Time Warner. Partially offsetting these increases in revenues were declines in our Latin America segment and Communications segment, driven by lower legacy services, video and wireless equipment revenues. Revenues were also negatively impacted by foreign exchange pressure.
Operations and support expenses increased in the first quarter of 2019. The increase was primarily due to our 2018 acquisition of Time Warner, partially offset by lower equipment costs in our Communications and Latin America segments and lower expenses due to our continued focus on cost management.
Depreciation and amortization expense increased in the first quarter of 2019. Depreciation expense increased $285, or 5.8%, primarily due to the Time Warner acquisition as well as ongoing capital spending for network upgrades and expansion.
Amortization expense increased $927 in 2019 primarily due to the amortization of intangibles associated with WarnerMedia.
Operating income increased in the first quarter of 2019. Our operating income margin in the first quarter decreased from 16.3% in 2018 to 16.1% in 2019.
Interest expense increased in the first quarter of 2019. The increase was primarily due to higher debt balances related to our acquisition of Time Warner, including interest expense on Time Warner notes.
Equity in net income of affiliates decreased in the first quarter of 2019, primarily due to basis amortization of Time Warner investments, which were acquired in the second quarter of 2018.
Other income (expense) - net decreased in the first quarter of 2019. The decrease was primarily due to actuarial losses of $432 in 2019 compared to an actuarial gain of $930 in the comparable prior year. First-quarter 2019 also includes $45 of debt redemption expenses.
Income taxes decreased in the first quarter of 2019. Our effective tax rate was 19.0% for the first quarter of 2019, versus 22.5% for the comparable year prior. The decrease in income tax expense was primarily due to lower income before income taxes and the impacts of tax settlements in the first quarter of 2019. The decrease in our effective tax rate was primarily due to the impacts of tax settlements.
COMMUNICATIONS SEGMENT
First Quarter
Percent
2019
2018
Change
Segment Operating Revenues
Mobility
$
17,567
$
17,355
1.2
%
Entertainment Group
11,328
11,431
(0.9)
Business Wireline
6,498
6,747
(3.7)
Total Segment Operating Revenues
35,393
35,533
(0.4)
Segment Operating Contribution
Mobility
5,351
5,158
3.7
Entertainment Group
1,478
1,309
12.9
Business Wireline
1,223
1,560
(21.6)
Total Segment Operating Contribution
$
8,052
$
8,027
0.3
%
Selected Subscribers and Connections
First Quarter
(000s)
2019
2018
Total domestic broadband connections
15,737
15,775
Network access lines in service
9,576
11,288
U-verse VoIP connections
4,935
5,585
Operating revenues decreased in the first quarter of 2019, driven by declines in our Entertainment Group and Business Wireline business units, partially offset by increases in our Mobility business unit. The decreases reflect continued declines in legacy voice and data products, decreased equipment revenues from lower postpaid smartphone sales and the shift to over-the-top (OTT) video offerings, largely offset by higher wireless service and advanced data revenues.
Operating contribution increased in the first quarter of 2019, reflecting improvement in our Mobility and Entertainment Group business units, partially offset by declines in our Business Wireline business unit. Our Communications segment operating income margin in the first quarter increased from 22.6% in 2018 to 22.8% in 2019.
Communications Business Unit Discussion
Mobility Results
First Quarter
Percent
2019
2018
Change
Operating revenues
Service
$
13,792
$
13,403
2.9
%
Equipment
3,775
3,952
(4.5)
Total Operating Revenues
17,567
17,355
1.2
Operating expenses
Operations and support
10,181
10,102
0.8
Depreciation and amortization
2,035
2,095
(2.9)
Total Operating Expenses
12,216
12,197
0.2
Operating Income
5,351
5,158
3.7
Equity in Net Income (Loss) of Affiliates
-
-
-
Operating Contribution
$
5,351
$
5,158
3.7
%
The following tables highlight other key measures of performance for Mobility:
First Quarter
Percent
(in 000s)
2019
2018
Change
Wireless Subscribers
Postpaid smartphones
60,597
60,002
1.0
%
Postpaid feature phones and data-centric devices
15,953
17,429
(8.5)
Postpaid
76,550
77,431
(1.1)
Prepaid
17,180
15,671
9.6
Reseller
7,574
9,002
(15.9)
Connected devices1
54,428
41,728
30.4
Total Wireless Subscribers
155,732
143,832
8.3
Wireless Net Additions2
Postpaid
(204)
49
-
Prepaid
96
241
(60.2)
Reseller
(253)
(388)
34.8
Connected devices1
3,088
2,728
13.2
Wireless Net Subscriber Additions
2,727
2,630
3.7
Postpaid Phone Subscribers
63,438
63,657
(0.3)
Postpaid Phone Net Additions
80
(60)
-
%
Postpaid Churn3
1.17
1.06
11
BP
Postpaid Phone-Only Churn 3
0.93
0.84
9
BP
1
Includes data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. Excludes
postpaid tablets.
2
Excludes acquisition-related additions during the period.
3
Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number
of wireless subscribers at the beginning of that month. The churn rate for the period is equal to the average of the churn rate for
each month of that period.
Service revenue increased in the first quarter largely due to higher average revenue per subscriber (ARPU) and growth in Cricket and AT&T PREPAIDSM subscribers.
ARPU
ARPU increased in the first quarter primarily due to price actions that were not in effect in the comparative prior year.
Churn
The effective management of subscriber churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Postpaid churn and postpaid phone-only churn was higher in the first quarter due to continued competitive pricing in the industry.
Equipment revenue decreased in the first quarter driven by lower postpaid smartphone sales, resulting from the continuing trend of customers choosing to upgrade devices less frequently or bring their own.
Operations and support expenses increased in the first quarter primarily due to higher commission deferral amortization, partially offset by lower postpaid smartphone volumes and increased operational efficiencies.
Depreciation expense decreased in the first quarter primarily due to fully depreciated assets, partially offset by ongoing capital spending for network upgrades and expansion.
Operating income increased in the first quarter. Our Mobility operating income margin in the first quarter increased from 29.7% in 2018 to 30.5% in 2019. Our Mobility EBITDA margin in the first quarter increased from 41.8% in 2018 to 42.0% in 2019. EBITDA is defined as operating contribution excluding equity in net income (loss) of affiliates and depreciation and amortization.
Subscriber Relationships
As the wireless industry has matured, future wireless growth will increasingly depend on our ability to offer innovative services, plans and devices and to provide these services in bundled product offerings with our video and broadband services. Subscribers that purchase two or more services from us have significantly lower churn than subscribers that purchase only one service. To support higher mobile video and data usage, our priority is to best utilize a wireless network that has sufficient spectrum and capacity to support these innovations on as broad a geographic basis as possible.
To attract and retain subscribers in a mature and highly competitive market, we have launched a wide variety of plans. Virtually all of our postpaid smartphone subscribers are on plans that provide for service on multiple devices at reduced rates, and such subscribers tend to have higher retention and lower churn rates. Such offerings are intended to encourage existing subscribers to upgrade their current services and/or add connected devices, attract subscribers from other providers and/or minimize subscriber churn.
Connected Devices
Connected devices include data-centric devices such as session-based tablets, monitoring devices and primarily wholesale automobile systems. The number of connected device subscriber relationships increased during the first quarter of 2019, driven by the addition of approximately 2.0 million wholesale connected cars through agreements with various carmakers and strong growth in other Internet of Things (IoT) connections. We believe that these connected car agreements give us the opportunity to create future retail relationships with the car owners.
Entertainment Group Results
First Quarter
Percent
2019
2018
Change
Operating revenues
Video entertainment
$
8,074
$
8,225
(1.8)
%
High-speed internet
2,070
1,878
10.2
Legacy voice and data services
683
806
(15.3)
Other service and equipment
501
522
(4.0)
Total Operating Revenues
11,328
11,431
(0.9)
Operating expenses
Operations and support
8,527
8,811
(3.2)
Depreciation and amortization
1,323
1,310
1.0
Total Operating Expenses
9,850
10,121
(2.7)
Operating Income
1,478
1,310
12.8
Equity in Net Income (Loss) of Affiliates
-
(1)
-
Operating Contribution
$
1,478
$
1,309
12.9
%
The following tables highlight other key measures of performance for the Entertainment Group business unit:
First Quarter
Percent Change
(in 000s)
2019
2018
Video Connections
Premium TV1
22,359
23,902
(6.5)
%
DIRECTV NOW2
1,508
1,467
2.8
Total Video Connections
23,867
25,369
(5.9)
Broadband Connections
IP1
13,822
13,616
1.5
DSL
632
816
(22.5)
Total Broadband Connections
14,454
14,432
0.2
Retail Consumer Switched Access Lines
3,787
4,535
(16.5)
U-verse Consumer VoIP Connections
4,393
5,105
(13.9)
Total Retail Consumer Voice Connections
8,180
9,640
(15.1)
Video Net Additions
Premium TV1,3
(544)
(187)
-
DIRECTV NOW2
(83)
312
-
Net Video Additions
(627)
125
-
Broadband Net Additions
IP1
93
154
(39.6)
DSL
(48)
(72)
33.3
Net Broadband Additions
45
82
(45.1)
Fiber Broadband Connections (included in IP)
3,060
1,955
56.5
Fiber Broadband Net Additions (included in IP)
297
226
31.4
%
1
2019 includes the impact of aligning our subscriber billing practice with the industry and AT&T Mobility to extend customer business
disconnection period to the end of the billing cycle, resulting in an increase of 117 net video and 38 net broadband subscribers at March
31, 2019.
2
Consistent with industry practice, DIRECTV NOW includes connections that are on a free-trial.
3
Includes disconnections for customers that migrated to DIRECTV NOW.
Video entertainment revenues are comprised of subscription and advertising revenues. Revenues decreased in the first quarter of 2019, largely driven by a 6.5% decline in premium TV subscribers. Our customers continue to shift, consistent with the rest of the industry, from a premium linear service to our more economically priced OTT video service which has pressured our video revenues. OTT net additions declined in the first quarter due to price changes and promotions. Churn rose for subscribers with premium TV only service, partially reflecting price increases.
High-speed internet revenues increased in the first quarter of 2019. In addition to the shift of subscribers to our higher-speed fiber services, our bundling strategy is helping to lower churn with subscribers who bundle broadband with another AT&T service, having about half the churn of broadband-only subscribers.
Legacy voice and data service revenues decreased in the first quarter of 2019, reflecting the continued migration of customers to our more advanced IP-based offerings or to competitors.
Operations and support expenses decreased in the first quarter of 2019. Contributing to the decreases were lower marketing costs and volumes, our ongoing focus on cost efficiencies, a one-time settlement of a carriage dispute and the impact of a prior update to the estimated economic life for our entertainment group customers.
Depreciation expense increased in the first quarter of 2019, primarily due to our ongoing capital spending for network upgrades and expansion.
Operating income increased in the first quarter of 2019. Our Entertainment Group operating income margin in the first quarter increased from 11.5% in 2018 to 13.0% in 2019. Our Entertainment Group EBITDA margin in the first quarter increased from 22.9% in 2018 to 24.7% in 2019.
Business Wireline Results
First Quarter
Percent
2019
2018
Change
Operating revenues
Strategic and managed services
$
3,792
$
3,595
5.5
%
Legacy voice and data services
2,404
2,865
(16.1)
Other service and equipment
302
287
5.2
Total Operating Revenues
6,498
6,747
(3.7)
Operating expenses
Operations and support
4,040
4,016
0.6
Depreciation and amortization
1,235
1,170
5.6
Total Operating Expenses
5,275
5,186
1.7
Operating Income
1,223
1,561
(21.7)
Equity in Net Income (Loss) of Affiliates
-
(1)
-
Operating Contribution
$
1,223
$
1,560
(21.6)
%
Strategic and managed services revenues increased in the first quarter of 2019. Our strategic services are made up of (1) data services, including our VPN, dedicated internet ethernet and broadband, (2) voice service, including VoIP and cloud-based voice solutions, (3) security and cloud solutions, and (4) managed, professional and outsourcing services. Revenue increases were primarily attributable to growth in our security and cloud solutions and managed services.
Legacy voice and data service revenues decreased in the first quarter of 2019, primarily due to lower demand as customers continue to shift to our more advanced IP-based offerings or our competitors.
Other service and equipment revenues increased in the first quarter of 2019, driven by revenues from intellectual property. Other service revenues include project-based revenue, which is nonrecurring in nature, as well as revenues from customer premises equipment.
Operations and support expenses increased in the first quarter of 2019, primarily due to higher fulfillment deferral amortization. Partially offsetting the increase is our continued efforts to shift to a software-based network and automate and digitize our customer support activities.
Depreciation expense increased in the first quarter, primarily due to increases in capital spending for network upgrades and expansion.
Operating income decreased in the first quarter of 2019. Our Business Wireline operating income margin in the first quarter decreased from 23.1% in 2018 to 18.8% in 2019. Our Business Wireline EBITDA margin in the first quarter decreased from 40.5% in 2018 to 37.8% in 2019.
WARNERMEDIA SEGMENT
First Quarter
Percent
2019
2018
Change
Segment Operating Revenues
Turner
$
3,443
$
112
-
%
Home Box Office
1,510
-
-
Warner Bros.
3,518
-
-
Eliminations & Other
(92)
-
-
Total Segment Operating Revenues
8,379
112
-
Segment Operating Contribution
Turner
1,272
64
-
Home Box Office
582
-
-
Warner Bros.
553
-
-
Eliminations & Other
(97)
(25)
-
Total Segment Operating Contribution
$
2,310
$
39
-
%
Our WarnerMedia segment consists of our Turner, Home Box Office and Warner Bros. business units. The order of presentation reflects the consistency of revenue streams, rather than overall magnitude as that is subject to timing and frequency of studio releases. WarnerMedia also includes our financial results for RSNs, which comprise the prior period results reported in this segment.
The WarnerMedia segment does not include results from Time Warner operations for the periods prior to our June 14, 2018 acquisition. Otter Media is included as an equity method investment for periods prior to our August 7, 2018 acquisition of the remaining interest and is in the segment operating results following the acquisition. Consistent with our past practice, many of the fair value adjustments from the application of purchase accounting required under GAAP have not been allocated to the segment, instead they are reported as acquisition-related items in the reconciliation to consolidated results.
Operating revenues were $8,379 in the first quarter of 2019.
Operating contribution was $2,310 for the first quarter of 2019. Our WarnerMedia segment operating income margin was 26.8%.
WarnerMedia Business Unit Discussion
Turner Results
First Quarter
Percent
2019
2018
Change
Operating revenues
Subscription
$
1,965
$
98
-
%
Advertising
1,261
14
-
Content and other
217
-
-
Total Operating Revenues
3,443
112
-
Operating expenses
Operations and support
2,136
74
-
Depreciation and amortization
60
1
-
Total Operating Expenses
2,196
75
-
Operating Income
1,247
37
-
Equity in Net Income of Affiliates
25
27
(7.4)
Operating Contribution
$
1,272
$
64
-
%
Turner includes the WarnerMedia businesses managed by Turner as well as our financial results for RSNs, which comprise the prior period results reported in this business unit.
Operating revenues for Turner are generated primarily from licensing programming to distribution affiliates and from selling advertising on its networks and digital properties. Revenues for the first quarter included $1,965 of subscription, $1,261 of advertising and $217 of content and other revenue.
Operations and support expenses totaled $2,136 for the first quarter of 2019.
Operating income was $1,247 in the first quarter of 2019. Our Turner operating income margin was 36.2% in the first quarter of 2019. Our Turner EBITDA margin was 38.0% in the first quarter of 2019.
Home Box Office Results
First Quarter
Percent
2019
2018
Change
Operating revenues
Subscription
$
1,334
$
-
-
%
Content and other
176
-
-
Total Operating Revenues
1,510
-
-
Operating expenses
Operations and support
921
-
-
Depreciation and amortization
22
-
-
Total Operating Expenses
943
-
-
Operating Income
567
-
-
Equity in Net Income of Affiliates
15
-
-
Operating Contribution
$
582
$
-
-
%
Operating revenues for Home Box Office are generated from the exploitation of original and licensed programming through distribution outlets. Revenues for the first quarter included $1,334 of subscription and $176 of content and other revenue.
Operations and support expenses totaled $921 for the first quarter of 2019.
Operating income was $567 in the first quarter of 2019. Our Home Box Office operating income margin was 37.5% in the first quarter of 2019. Our Home Box Office EBITDA margin was 39.0% in the first quarter of 2019.
Warner Bros. Results
First Quarter
Percent
2019
2018
Change
Operating revenues
Theatrical product
$
1,506
$
-
-
%
Television product
1,613
-
-
Games and other
399
-
-
Total Operating Revenues
3,518
-
-
Operating expenses
Operations and support
2,919
-
-
Depreciation and amortization
52
-
-
Total Operating Expenses
2,971
-
-
Operating Income
547
-
-
Equity in Net Income of Affiliates
6
-
-
Operating Contribution
$
553
$
-
-
%
Operating revenues for Warner Bros. primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television or OTT services). For the first quarter, total operating revenues were $3,518 and included $1,506 from theatrical product, $1,613 from television product and $399 from games and other.
Operations and support expenses totaled $2,919 for the first quarter of 2019.
Operating income was $547 in the first quarter of 2019. Our Warner Bros. operating income margin was 15.5% in the first quarter of 2019. Our Warner Bros. EBITDA margin was 17.0% in the first quarter of 2019.
LATIN AMERICA SEGMENT
First Quarter
Percent
2019
2018
Change
Segment Operating Revenues
Vrio
$
1,067
$
1,354
(21.2)
%
Mexico
651
671
(3.0)
Total Segment Operating Revenues
1,718
2,025
(15.2)
Segment Operating Contribution
Vrio
32
148
(78.4)
Mexico
(205)
(259)
20.8
Total Segment Operating Contribution
$
(173)
$
(111)
(55.9)
%
Operating Results
Our Latin America operations conduct business in their local currency and operating results are converted to U.S. dollars using official exchange rates, subjecting results to foreign currency fluctuations.
Operating revenues decreased in the first quarter of 2019 driven by lower revenues for Vrio, primarily resulting from foreign exchange pressure.
Operating contribution decreased in the first quarter of 2019, reflecting foreign exchange pressure. Our Latin America segment operating income margin in the first quarter was (10.1)% in 2019 and (5.5)% in 2018.
Latin America Business Unit Discussion
Vrio Results
First Quarter
Percent
2019
2018
Change
Operating revenues
$
1,067
$
1,354
(21.2)
%
Operating expenses
Operations and support
866
1,001
(13.5)
Depreciation and amortization
169
205
(17.6)
Total Operating Expenses
1,035
1,206
(14.2)
Operating Income
32
148
(78.4)
Operating Contribution
$
32
$
148
(78.4)
%
The following tables highlight other key measures of performance for Vrio:
First Quarter
Percent
(in 000s)
2019
2018
Change
Vrio Video Subscribers1,2
13,584
13,573
0.1
%
Vrio Video Net Subscriber Additions3
(32)
(15)
-
%
1
Excludes subscribers of our equity investment in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.6 million
subscribers at December 31, 2018 and 7.9 million subscribers at March 31, 2018.
2
2019 excludes the impact of 222 subscriber disconnections resulting from conforming our video credit policy across the region, which is
reflected in beginning of period subscribers.
3
Excludes SKY Mexico net subscriber losses of 199 and 92 for the quarter ended December 31, 2018 and March 31, 2018, respectively.
Operating revenues decreased in the first quarter of 2019, primarily due to foreign exchange pressures.
Operations and support expenses decreased in the first quarter of 2019, primarily due to changes in foreign currency exchange rates. Approximately 17% of Vrio expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation expense decreased in the first quarter of 2019, primarily due to changes in foreign currency exchange rates.
Operating income decreased in the first quarter of 2019. Our Vrio operating income margin in the first quarter decreased from 10.9% in 2018 to 3.0% in 2019. Our Vrio EBITDA margin in the first quarter decreased from 26.1% in 2018 to 18.8% in 2019.
Mexico Results
First Quarter
2019
2018
Percent Change
Operating revenues
Service
$
442
$
404
9.4
%
Equipment
209
267
(21.7)
Total Operating Revenues
651
671
(3.0)
Operating expenses
Operations and support
725
803
(9.7)
Depreciation and amortization
131
127
3.1
Total Operating Expenses
856
930
(8.0)
Operating Income (Loss)
(205)
(259)
20.8
Operating Contribution
$
(205)
$
(259)
20.8
%
The following tables highlight other key measures of performance for Mexico:
First Quarter
Percent
(in 000s)
2019
2018
Change
Mexico Wireless Subscribers1
Postpaid
5,642
5,607
0.6
%
Prepaid
11,779
9,857
19.5
Reseller
301
178
69.1
Total Mexico Wireless Subscribers
17,722
15,642
13.3
%
Mexico Wireless Net Additions
Postpaid
(69)
109
-
%
Prepaid
114
459
(75.2)
Reseller
48
(25)
-
Mexico Wireless
Net Subscriber Additions
93
543
(82.9)
%
1
2019 excludes the impact of 692 subscriber disconnections resulting from the churn of customers related to sales by certain third-party
distributors and the sunset of 2G services in Mexico, which are reflected in beginning of period subscribers.
Service revenues increased in the first quarter of 2019, primarily due to growth in our subscriber base.
Equipment revenues decreased in the first quarter of 2019, primarily due to higher demand in the prior year for our initial offering of equipment installment programs partially offset by growth in our subscriber base.
Operations and support expenses decreased in the first quarter of 2019, primarily driven by equipment sales and inventory reserves. These decreases were partially offset by higher bad debt expenses. Approximately 7% of Mexico expenses are U.S. dollar based, with the remainder in the local currency.
Depreciation and amortization expense increased in the first quarter of 2019 primarily due to the amortization of spectrum licenses and higher in-service assets, partly offset by changes in the useful lives of certain assets.
Operating income increased in the first quarter of 2019. Our Mexico operating income margin in the first quarter increased from (38.6)% in 2018 to (31.5)% in 2019. Our Mexico EBITDA margin in the first quarter increased from (19.7)% in 2018 to (11.4)% in 2019.
XANDR SEGMENT
First Quarter
Percent
2019
2018
Change
Operating revenues
$
426
$
337
26.4
%
Operating expenses
Operations and support
160
50
-
Depreciation and amortization
13
1
-
Total Operating Expenses
173
51
-
Operating Income
253
286
(11.5)
Equity in Net Income of Affiliates
-
-
-
Operating Contribution
$
253
$
286
(11.5)
%
Operating revenues increased in the first quarter of 2019, primarily due to our acquisition of AppNexus in August 2018.
Operations and support expenses increased in the first quarter of 2019, primarily due to our acquisition of AppNexus and our ongoing development of the platform supporting Xandr's business.
Operating income decreased in the first quarter of 2019. Our Xandr segment operating income margin in the first quarter decreased from 84.9% in 2018 to 59.4% in 2019.
SUPPLEMENTAL TOTAL ADVERTISING REVENUE INFORMATION
As a supplemental presentation to our Xandr segment operating results, we are providing a view of total advertising revenues generated by AT&T. This combined view presents the entire portfolio of advertising revenues reported across all operating segments and represents a significant strategic initiative and growth opportunity for AT&T. See revenue categories tables in Note 5 for a reconciliation.
Total Advertising Revenues
First Quarter
Percent
2019
2018
Change
Operating Revenues
WarnerMedia
$
1,279
$
14
-
%
Communications
417
375
11.2
Xandr
426
337
26.4
Eliminations
(350)
(334)
(4.8)
Total Advertising Revenues
$
1,772
$
392
-
%
SUPPLEMENTAL COMMUNICATIONS OPERATING INFORMATION
As a supplemental presentation to our Communications segment operating results, we are providing a view of our AT&T Business Solutions results which includes both wireless and wireline operations. This combined view presents a complete profile of the entire business customer relationship, and underscores the importance of mobile solutions to serving our business customers. See "Discussion and Reconciliation of Non-GAAP Measure" for a reconciliation of these supplemental measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
Business Solutions Results
First Quarter
2019
2018
Percent Change
Operating revenues
Wireless service
$
1,913
$
1,791
6.8
%
Strategic and managed services
3,792
3,595
5.5
Legacy voice and data services
2,404
2,865
(16.1)
Other service and equipment
302
287
5.2
Wireless equipment
596
578
3.1
Total Operating Revenues
9,007
9,116
(1.2)
Operating expenses
Operations and support
5,640
5,594
0.8
Depreciation and amortization
1,541
1,458
5.7
Total Operating Expenses
7,181
7,052
1.8
Operating Income
1,826
2,064
(11.5)
Equity in Net Income of Affiliates
-
(1)
-
Operating Contribution
$
1,826
$
2,063
(11.5)
%
OTHER BUSINESS MATTERS
Time Warner In June 2018, we completed our acquisition of Time Warner, a leader in media and entertainment whose major businesses encompass an array of some of the most respected media brands. In July 2018, the U.S. Department of Justice (DOJ) appealed the U.S. District Court's decision permitting the merger. On February 26, 2019, the D.C. Circuit unanimously affirmed our win. AT&T's representations to the DOJ regarding its operation of Turner expired on February 28, 2019. The DOJ did not ask the D.C. Circuit to rehear its appeal before the applicable April 12, 2019 deadline, and it stated publicly on February 26, 2018 that "[t]he department has no plans to seek further review" of the D.C. Circuit's decision. The DOJ's deadline to file a petition for writ of certiorari with the United States Supreme Court is May 28, 2019.
Labor Contracts As of March 31, 2019, we employed approximately 262,000 persons. Approximately 40% of our employees are represented by the Communications Workers of America (CWA), the International Brotherhood of Electrical Workers (IBEW) or other unions. After expiration of the agreements, work stoppages or labor disruptions may occur in the absence of new contracts or other agreements being reached. A contract now covering approximately 8,000 traditional wireline employees in our Midwest region expired in April 2018 and employees are working under the terms of the prior contract, including benefits, while negotiations continue. In addition, a contract now covering approximately 3,000 traditional wireline employees in our legacy AT&T Corp. business also expired in April 2018. Those employees are working under the terms of their prior contract, including benefits, while negotiations continue.
COMPETITIVE AND REGULATORY ENVIRONMENT
Overview AT&T subsidiaries operating within the United States are subject to federal and state regulatory authorities. AT&T subsidiaries operating outside the United States are subject to the jurisdiction of national and supranational regulatory authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act), Congress established a national policy framework intended to bring the benefits of competition and investment in advanced telecommunications facilities and services to all Americans by opening all telecommunications markets to competition and reducing or eliminating regulatory burdens that harm consumer welfare. Since the Telecom Act was passed, the Federal Communications Commission (FCC) and some state regulatory commissions have maintained or expanded certain regulatory requirements that were imposed decades ago on our traditional wireline subsidiaries when they operated as legal monopolies. The new leadership at the FCC is charting a more predictable and balanced regulatory course that will encourage long-term investment and benefit consumers. Based on its public statements, we expect the FCC to continue to eliminate antiquated, unnecessary regulations and streamline processes. In addition, we are pursuing, at both the state and federal levels, additional legislative and regulatory measures to reduce regulatory burdens that are no longer appropriate in a competitive telecommunications market and that inhibit our ability to compete more effectively and offer services wanted and needed by our customers, including initiatives to transition services from traditional networks to all IP-based networks. At the same time, we also seek to ensure that legacy regulations are not further extended to broadband or wireless services, which are subject to vigorous competition.
We have organized the following discussion by reportable segment.
Communications Segment
Internet In February 2015, the FCC released an order classifying both fixed and mobile consumer broadband internet access services as telecommunications services, subject to Title II of the Communications Act. The Order, which represented a departure from longstanding bipartisan precedent, significantly expanded the FCC's authority to regulate broadband internet access services, as well as internet interconnection arrangements. In December 2017, the FCC reversed its 2015 decision by reclassifying fixed and mobile consumer broadband services as information services and repealing most of the rules that were adopted in 2015. In lieu of broad conduct prohibitions, the order requires internet service providers to disclose information about their network practices and terms of service, including whether they block or throttle internet traffic or offer paid prioritization. Several parties appealed the FCC's December 2017 decision and the D.C. Circuit heard oral argument on the appeals on February 1, 2019. Although the FCC order expressly preempted inconsistent state or local measures, a number of states are considering or have adopted legislation that would reimpose the very rules the FCC repealed, and in some cases, establish additional requirements that go beyond the FCC's February 2015 order. Additionally, some state governors have issued executive orders that effectively reimpose the repealed requirements. Suits have recently been filed concerning laws in California and Vermont, and other lawsuits are possible. The California and Vermont suits have been stayed pursuant to agreements by those states not to enforce their laws pending resolution of appeals of the FCC's December 2017 order. We will continue to support congressional action to codify a set of standard consumer rules for the internet.
In October 2016, a sharply divided FCC adopted new rules governing the use of customer information by providers of broadband internet access service. Those rules were more restrictive in certain respects than those governing other participants in the internet economy, including so-called "edge" providers such as Google and Facebook. In April 2017, the president signed a resolution passed by Congress repealing the new rules under the Congressional Review Act.
Privacy-related legislation has been considered in a number of states. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the state of California enacted comprehensive privacy legislation that effective as of January 1, 2020, gives California consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right to opt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information.
Wireless The industry-wide deployment of 5G technology, which is needed to satisfy extensive demand for video and internet access, will involve significant deployment of "small cell" equipment and therefore increase the need for local permitting processes that allow for the placement of small cell equipment on reasonable timelines and terms. Federal regulations also can delay and impede broadband services, including small cell equipment. In March, August and September 2018, the FCC adopted orders to streamline the wireless infrastructure review process in order to facilitate deployment of next-generation wireless facilities. Those orders have been appealed and the various appeals remain pending in the DC Circuit and 9th Circuit Court of Appeals. In addition, to date, 21 states have adopted legislation to facilitate small cell deployment.
In December 2018, we introduced the nation's first commercial mobile 5G service. We currently have mobile 5G in parts of 19 U.S. cities and will have launched mobile 5G service in at least 22 major cities by the end of the year. We expect to have mobile 5G service nationwide to more than 200 million people by early 2020.
LIQUIDITY AND CAPITAL RESOURCES
We had $6,516 in cash and cash equivalents available at March 31, 2019. Cash and cash equivalents included cash of $2,786 and money market funds and other cash equivalents of $3,730. Approximately $2,443 of our cash and cash equivalents were held by our foreign entities in accounts predominantly outside of the U.S. and may be subject to restrictions on repatriation.
Cash and cash equivalents increased $1,312 since December 31, 2018. In the first three months of 2019, cash inflows were primarily provided by the cash receipts from operations, including cash from our sale and transfer of certain wireless equipment installment and other customer receivables to third parties, issuance of commercial paper and long-term debt and collateral received from banks and other participants in our derivative arrangements. These inflows were offset by cash used to meet the needs of the business, including, but not limited to, payment of operating expenses, debt repayments, funding capital expenditures and vendor financing payments, and dividends to stockholders.
Cash Provided by or Used in Operating Activities
During the first three months of 2019, cash provided by operating activities was $11,052, compared to $8,947 for the first three months of 2018. Higher operating cash flows in 2019 were primarily due to contributions from WarnerMedia, including our new securitization program (see Note 9), and higher cash flows from working capital initiatives, partly offset by lower net tax refunds.
We actively manage the timing of our supplier payments for non-capital items to optimize the use of our cash. Among other things, we seek to have payments made on 90-day or greater terms, while providing the suppliers with access to bank facilities that permit earlier payments at their cost. In addition, for payments to a key supplier, we have arrangements that allow us to extend payment terms up to 90 days at an additional cost to us (referred to as supplier financing). The net impact of supplier financing reduced cash from operating activities by $904 and $344 for the three months ended March 31, 2019 and 2018, respectively. All supplier financing payments are due within one year.
Cash Used in or Provided by Investing Activities
For the first three months of 2019, cash used in investing activities totaled $5,401, and consisted primarily of $5,182 for capital expenditures, including interest during construction ($936 lower than the prior-year comparable period).
For capital improvements, we have negotiated favorable vendor payment terms of 120 days or more (referred to as vendor financing) with some of our vendors, which are excluded from capital expenditures and reported as financing activities. For the first three months of 2019, these vendor financing payments were $820, and when combined with $5,182 of capital expenditures, total capital investment was $6,002 ($288 lower than the prior-year comparable period). In the first quarter of 2019, we placed $733 of equipment in service under vendor financing arrangements. Total vendor financing payables included in our March 31, 2019 consolidated balance sheets were $2,403, with $1,883 due within one year (in "Accounts payable and accrued liabilities") and the remainder predominately due within two to three years (in "Other noncurrent liabilities").
The vast majority of our capital expenditures are spent on our networks, including product development and related support systems. During the first quarter, approximately $300 of assets related to the FirstNet build were placed into service.
The amount of capital expenditures is influenced by demand for services and products, capacity needs and network enhancements. We are also focused on ensuring DIRECTV merger commitments are met. As of March 31, 2019, we market our fiber-to-the-premises network to more than 12 million customer locations and are on track to meet our FCC commitment of 12.5 million locations by mid-2019.
Cash Provided by or Used in Financing Activities
For the first three months of 2019, cash used in financing activities totaled $4,421 and included net proceeds of $9,182, which consisted primarily of the following issuances:
· January draw of $2,850 on an 11-month syndicated term loan agreement.
· January borrowings of $725 supported by government agencies to support network equipment purchases.
· January draw of $750 on a private financing agreement.
· February issuance of $3,000 of 4.350% global notes due 2029.
· February issuance of $2,000 of 4.850% global notes due 2039.
During the first three months of 2019, repayment of long-term debt totaled $9,840, consisting of the following:
· The final $2,625 of amounts outstanding under our Acquisition Term Loan (defined below).
· $750 of January borrowings under a private financing agreement.
· $1,850 of 2.300% notes due 2019.
· $400 of floating rate notes due 2019.
· $890 of 5.200% notes due 2020.
· $1,120 of 5.000% notes due 2021.
· $1,000 of 4.700% Warner Media, LLC notes due 2021.
· $1,000 of 4.750% Warner Media, LLC notes due 2021.
· $38 of 4.600% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due 2021.
· $40 of 5.000% DIRECTV Holdings LLC and DIRECTV Financing Co., Inc. notes due 2021.
Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.4% as of March 31, 2019 and December 31, 2018. We had $170,532 of total notes and debentures outstanding at March 31, 2019, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso, Canadian dollar and Australian dollar denominated debt that totaled approximately $41,061.
At March 31, 2019, we had $11,538 of debt maturing within one year, including $2,957 of commercial paper borrowings and $8,441 of long-term debt issuances. Debt maturing within one year includes the following notes that may be put back to us by the holders:
· $1,000 of annual put reset securities issued by BellSouth that may be put back to us each April until maturity in 2021.
· An accreting zero-coupon note that may be redeemed each May until maturity in 2022. If the remainder of the zero-coupon note (issued for principal of $500 in 2007 and partially exchanged in the 2017 debt exchange offers) is held to maturity, the redemption amount will be $592.
At March 31, 2019, we had approximately 376 million shares remaining from share repurchase authorizations approved by the Board of Directors in 2013 and 2014.
We paid dividends of $3,714 during the first three months of 2019, compared with $3,070 for the first three months of 2018, primarily reflecting the increase in the number of shares outstanding related to our acquisition of Time Warner as well as an increase in our quarterly dividend approved by our Board of Directors in December 2018. Dividends declared by our Board of Directors totaled $0.51 per share in the first three months of 2019 and $0.50 per share for the first three months of 2018. Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our Board of Directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods. All dividends remain subject to declaration by our Board of Directors.
Credit Facilities
The following summary of our various credit and loan agreements does not purport to be complete and is qualified in its entirety by reference to each agreement filed as exhibits to our Annual Report on Form 10-K.
We use credit facilities as a tool in managing our liquidity status. In December 2018, we amended our five-year revolving credit agreement (the "Amended and Restated Credit Agreement") and concurrently entered into a new five-year agreement (the "Five Year Credit Agreement") such that we now have two $7,500 revolving credit agreements totaling $15,000. The Amended and Restated Credit Agreement terminates on December 11, 2021 and the Five Year Credit Agreement terminates on December 11, 2023. No amounts were outstanding under either agreement as of March 31, 2019.
In September 2017, we entered into a $2,250 syndicated term loan credit agreement containing (i) a three-year $750 term loan facility, (ii) a four-year $750 term loan facility and (iii) a five-year $750 term loan facility, with certain investment and commercial banks and The Bank of Nova Scotia, as administrative agent. We drew on all three facilities during the first quarter of 2018, with $2,250 in advances outstanding as of March 31, 2019.
On November 20, 2018, we entered into and drew on a 4.5 year $3,550 term loan credit agreement (the "November 2018 Term Loan") with Bank of America, N.A., as agent. We used the proceeds to finance the repayment, in part, of loans outstanding under the Acquisition Term Loan. As of March 31, 2019, $3,550 was outstanding under this agreement.
On January 31, 2019, we entered into and drew on an 11-month $2,850 syndicated term loan credit agreement (the "Citibank Term Loan"), with certain investment and commercial banks and Citibank, N.A., as administrative agent. As of March 31, 2019, $2,850 was outstanding under this agreement.
In anticipation of the Time Warner acquisition, we entered into a $16,175 term loan agreement ("Acquisition Term Loan") containing (i) a 2.5 year $8,087.5 facility (the "Tranche A Facility") and (ii) a 4.5 year $8,087.5 facility (the "Tranche B Facility") with a commitment termination date of December 31, 2018. As of December 31, 2018, $2,625 was outstanding of Tranche A advances. We paid $2,625 of the Tranche A advances on February 20, 2019, and terminated the facility.
We also utilize other external financing sources, which include various credit arrangements supported by government agencies to support network equipment purchases, as well as a commercial paper program.
Each of our credit and loan agreements contains covenants that are customary for an issuer with an investment grade senior debt credit rating as well as a net debt-to-EBITDA financial ratio covenant requiring AT&T to maintain, as of the last day of each fiscal quarter, a ratio of not more than 3.5-to-1. As of March 31, 2019, we were in compliance with the covenants for our credit facilities.
Collateral Arrangements
During the quarter, we amended collateral arrangements with certain counterparties to require cash collateral posting by AT&T only when deposit amounts exceed certain thresholds. Under these arrangements, counterparties are still required to post collateral. During the first three months of 2019, we received $1,404 of cash collateral, on a net basis, primarily driven by the amended arrangements. Cash postings under these arrangements vary with changes in credit ratings and netting agreements. (See Note 7)
Other
Our total capital consists of debt (long-term debt and debt maturing within one year) and stockholders' equity. Our capital structure does not include debt issued by our equity method investments. At March 31, 2019, our debt ratio was 47.4%, compared to 52.6% at March 31, 2018 and 47.7% at December 31, 2018. Our net debt ratio was 45.6% at March 31, 2019, compared to 36.8% at March 31, 2018 and 46.2% at December 31, 2018. The debt ratio is affected by the same factors that affect total capital, and reflects our recent debt issuances and repayments.
During the first three months of 2019, we received $4,460 from the monetization of various assets, primarily from the sale of certain equipment installment and other customer receivables. We plan to continue to explore similar opportunities. To that end, in April 2019, we received $1,430 cash for the sale of our minority stake in Hulu. We also entered into an agreement to sell WarnerMedia's headquarters (Hudson Yards) for approximately $2,200 under a sale/leaseback agreement, which is expected to close late in the second quarter. Proceeds from both transactions will be used to reduce debt levels.
DISCUSSION AND RECONCILIATION OF NON-GAAP MEASURE
We believe the following measure is relevant and useful information to investors as it is used by management as a method of comparing performance with that of many of our competitors. This supplemental measure should be considered in addition to, but not as a substitute of, our consolidated and segment financial information.
Business Solutions Reconciliation
We provide a supplemental discussion of our Business Solutions operations that is calculated by combining our Mobility and Business Wireline business units, and then adjusting to remove non-business operations. The following table presents a reconciliation of our supplemental Business Solutions results.
First Quarter
March 31, 2019
March 31, 2018
Mobility
Business Wireline
Adjustments1
Business Solutions
Mobility
Business Wireline
Adjustments1
Business Solutions
Operating Revenues
Wireless service
$
13,792
$
-
$
(11,879)
$
1,913
$
13,403
$
-
$
(11,612)
$
1,791
Strategic and managed services
-
3,792
-
3,792
-
3,595
-
3,595
Legacy voice and data services
-
2,404
-
2,404
-
2,865
-
2,865
Other service and equipment
-
302
-
302
-
287
-
287
Wireless equipment
3,775
-
(3,179)
596
3,952
-
(3,374)
578
Total Operating Revenues
17,567
6,498
(15,058)
9,007
17,355
6,747
(14,986)
9,116
Operating Expenses
Operations and support
10,181
4,040
(8,581)
5,640
10,102
4,016
(8,524)
5,594
EBITDA
7,386
2,458
(6,477)
3,367
7,253
2,731
(6,462)
3,522
Depreciation and amortization
2,035
1,235
(1,729)
1,541
2,095
1,170
(1,807)
1,458
Total Operating Expense
12,216
5,275
(10,310)
7,181
12,197
5,186
(10,331)
7,052
Operating Income
5,351
1,223
(4,748)
1,826
5,158
1,561
(4,655)
2,064
Equity in net income (loss)
of affiliates
-
-
-
-
-
(1)
-
(1)
Operating Contribution
$
5,351
$
1,223
$
(4,748)
$
1,826
$
5,158
$
1,560
$
(4,655)
$
2,063
1Non-business wireless reported in the Communications segment under the Mobility business unit.
At March 31, 2019, we had interest rate swaps with a notional value of $1,633 and a fair value of $(11).
We have fixed-to-fixed and floating-to-fixed cross-currency swaps on foreign currency-denominated debt instruments with a U.S. dollar notional value of $42,192 to hedge our exposure to changes in foreign currency exchange rates. These derivatives have been designated at inception and qualify as cash flow hedges with a net fair value of $(2,270) at March 31, 2019.
We have foreign exchange contracts with a U.S. dollar notional value of $1,238 to provide currency at a fixed rate to hedge a portion of the exchange risk involved in foreign currency-denominated transactions. These foreign exchange contracts include fair value hedges, cash flow hedges and economic (nonqualifying) hedges with a total net fair value of $81 at March 31, 2019.
We have designated €700 million aggregate principal amount of debt as a hedge of the variability of some of the Euro-denominated net investments of WarnerMedia. The gain or loss on the debt that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency translation adjustment within accumulated other comprehensive income, net on the consolidated balance sheet.
Item 4. Controls and Procedures
The registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the registrant is recorded, processed, summarized, accumulated and communicated to its management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The chief executive officer and chief financial officer have performed an evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of March 31, 2019. Based on that evaluation, the chief executive officer and chief financial officer concluded that the registrant's disclosure controls and procedures were effective as of March 31, 2019.
Information set forth in this report contains forward-looking statements that are subject to risks and uncertainties, and actual results could differ materially. Many of these factors are discussed in more detail in the "Risk Factors" section. We claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially from those expressed in the forward-looking statements:
· Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms.
· Changes in available technology and the effects of such changes, including product substitutions and deployment costs.
· Increases in our benefit plans' costs, including increases due to adverse changes in the United States and foreign securities markets, resulting in worse-than-assumed investment returns and discount rates; adverse changes in mortality assumptions; adverse medical cost trends; and unfavorable or delayed implementation or repeal of healthcare legislation, regulations or related court decisions.
· The final outcome of FCC and other federal, state or foreign government agency proceedings (including judicial review, if any, of such proceedings) and legislative efforts involving issues that are important to our business, including, without limitation, special access and business data services; pending Notices of Apparent Liability; the transition from legacy technologies to IP-based infrastructure, including the withdrawal of legacy TDM-based services; universal service; broadband deployment; wireless equipment siting regulations; E911 services; competition policy; privacy; net neutrality; multichannel video programming distributor services and equipment; content licensing and copyright protection; availability of new spectrum, on fair and balanced terms; and wireless and satellite license awards and renewals.
· Enactment of additional state, local, federal and/or foreign regulatory and tax laws and regulations, or changes to existing standards and actions by tax agencies and judicial authorities including the resolution of disputes with any taxing jurisdictions, pertaining to our subsidiaries and foreign investments, including laws and regulations that reduce our incentive to invest in our networks, resulting in lower revenue growth and/or higher operating costs.
· Potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the FCC could negatively impact WarnerMedia's ability to deliver linear network feeds of its domestic cable networks to its affiliates, and in some cases, WarnerMedia's ability to produce high-value news and entertainment programming on location.
· U.S. and foreign laws and regulations regarding intellectual property rights protection and privacy, personal data protection and user consent are complex and rapidly evolving and could result in impact to our business plans, increased costs, or claims against us that may harm our reputation.
· Our ability to respond to revenue and margin pressures from increasing competition, including services that use alternative technologies and/or government-owned or subsidized networks.
· The ability of our competitors to offer product/service offerings at lower prices due to lower cost structures and regulatory and legislative actions adverse to us, including non-regulation of comparable alternative technologies (e.g., VoIP and data usage).
· The continued development and delivery of attractive and profitable wireless, video and broadband offerings and devices; the extent to which regulatory and build-out requirements apply to our offerings; our ability to match speeds offered by our competitors and the availability, cost and/or reliability of the various technologies and/or content required to provide such offerings.
· Our ability to generate advertising revenue from attractive video content, especially from WarnerMedia, in the face of unpredictable and rapidly evolving public viewing habits.
· The availability and cost and our ability to adequately fund additional wireless spectrum and network upgrades; and regulations and conditions relating to spectrum use, licensing, obtaining additional spectrum, technical standards and deployment and usage, including network management rules.
· Our ability to manage growth in wireless data services, including network quality and acquisition of adequate spectrum at reasonable costs and terms.
· The outcome of pending, threatened or potential litigation (which includes arbitrations), including, without limitation, patent and product safety claims by or against third parties.
· The impact from major equipment or software failures on our networks, including satellites operated by DIRECTV; the effect of security breaches related to the network or customer information; our inability to obtain handsets, equipment/software or have handsets, equipment/software serviced in a timely and cost-effective manner from suppliers; and in the case of satellites launched, timely provisioning of services from vendors; or severe weather conditions including flooding and hurricanes, natural disasters including earthquakes and forest fires, pandemics, energy shortages, wars or terrorist attacks.
· The issuance by the Financial Accounting Standards Board or other accounting oversight bodies of new accounting standards or changes to existing standards.
· Our ability to successfully integrate our WarnerMedia operations, including the ability to manage various businesses in widely dispersed business locations and with decentralized management.
· Our ability to take advantage of the desire of advertisers to change traditional video advertising models.
· Our increased exposure to foreign economies, including foreign exchange fluctuations as well as regulatory and political uncertainty.
· Changes in our corporate strategies, such as changing network-related requirements or acquisitions and dispositions, which may require significant amounts of cash or stock, to respond to competition and regulatory, legislative and technological developments.
· The uncertainty surrounding further congressional action to address spending reductions, which may result in a significant decrease in government spending and reluctance of businesses and consumers to spend in general.
Readers are cautioned that other factors discussed in this report, although not enumerated here, also could materially affect our future earnings.
Item 1A. Risk Factors
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the first quarter 2019, there were no such material developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) A summary of our repurchases of common stock during the first quarter of 2019 is as follows:
(a)
(b)
(c)
(d)
Period
Total Number of Shares (or Units) Purchased 1, 2, 3
Average Price Paid Per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs1
Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under The Plans or Programs
January 1, 2019 -
January 31, 2019
710,607
$
30.46
-
375,662,000
February 1, 2019 -
February 28, 2019
3,021,234
30.29
-
375,662,000
March 1, 2019 -
March 31, 2019
3,113,701
30.52
-
375,662,000
Total
6,845,542
$
30.41
-
1
In March 2014, our Board of Directors approved an additional authorization to repurchase up to 300 million shares of our common
stock. In March 2013, our Board of Directors authorized the repurchase of up to an additional 300 million shares of our common stock.
The authorizations have no expiration date.
2
Of the shares repurchased, 6,237,118 shares were acquired through the withholding of taxes on the vesting of restricted stock
and performance shares or on the exercise price of options.
3
Of the shares repurchased, 608,424 shares were acquired through reimbursements from AT&T maintained Voluntary Employee Benefit
Association (VEBA) trusts.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as a part of this report:
Exhibit
Number
Exhibit Description
31
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32
Section 1350 Certifications
101
XBRL Instance Document
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 6, 2019
AT&T Inc.
/s/ John J. Stephens
John J. Stephens
Senior Executive Vice President
and Chief Financial Officer
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDQRFZKLFLKEFZBBK
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